With the stress in the economy expected to remain elevated, the gross non-performing assets
(GNPA) ratio of scheduled commercial banks
(SCBs) could hit the 11 per cent mark by end-September next year, according to the Reserve Bank of India’s Financial Stability Report (FSR).
The overall risks to the banking sector remained elevated due to asset quality concerns. Between March and September, the GNPA
advances ratio of SCBs increased from 9.6 per cent to 10.2 per cent, and the stressed advances ratio marginally increased from 12.1 per cent to 12.2 per cent. Public sector banks
(PSBs) registered GNPA
ratio at 13.5 per cent and stressed advances ratio at 16.2 per cent in September, according to the FSR which was released on Thursday.
The macro stress test for credit risk indicates that under the baseline macro scenario, the GNPA
ratio may increase to 10.8 per cent by March 2018 and further to 11.1 per cent by September 2018. A “stress test” is an analysis conducted on a bank, under unfavorable economic scenarios, to see if it has enough capital to withstand the impact of adverse shocks or developments.
“If the macro conditions deteriorate, CRAR or capital-to-risk (weighted) assets
ratio of SCBs goes below the minimum regulatory requirements. Under the severe stress scenario, the system level CRAR declines from 13.5 per cent in September 2017 to 11.5 per cent by September 2018,” the FSR notes.
The recent capitalisation plan announced by the government for public sector banks
(PSBs) is expected to significantly augment capital buffers of affected banks
as also the credit growth.
are meant to have some amount of risk absorbing capacity, hence central bankers and regulators world over mandate, minimum cash reserves, capital reserves, liquidity positions and provisioning levels, amongst other conditions. The FSR’s findings note that all PSBs, and some Private ones, had a negative provisioning gap; assuming a benchmark provision coverage at 50 per cent.
A negative gap for a bank means that the actual provision levels maintained by the bank are less than their target provisions (level), therefore, having under-provided for the risk. Further, if there are negative returns on the assets
of under-provisioned PSBs, this could hinder the banks’ ability to further build-up their loss absorption capacity.
The FSR points out that shocks emanating from the infrastructure sector will considerably hit the profitability of banks.
The most severe shocks could wipe out about 87 per cent of the profits banks
receive. Additionally, the power sector has the most significant single factor shock effect, the FSR notes.