(RBI) has reduced its indicative estimate for aggregate bad loans in the Indian banking system in the worst case scenario in its mid year financial stability report (FSR)citing regulatory support and strong capital base of banks.
In its bi annual FSR, RBI said banking sector NPAs can increase to a maximum of 11.22% in the worst case down from 14.8% predicted in the worst case scenario in the last report in January. Gross NPAs will also be lower in the baseline scenario at 9.80% versus the 13.5% predicted in January.
The improvement in the health of banks over earlier expectations is “indicative of pandemic proofing by regulatory support,” RBI said.
Within the bank groups, public sector banks’ gross NPAs can increase 298 basis points from 9.54% in March 2021 to 12.52% by March 2022 under the baseline scenario and can go up to 13.95% in the worst case scenario. One basis point is 0.01 percentage point. This is an improvement for the RBI assessment in January which had indicated PSU bank NPAs could rise by as much as 650 basis points to 16.2% in September 2021 from 9.7% in September 2020.
Similarly the impact on private sector and foreign banks is less severe than previously anticipated. Baseline gross NPAs for private sector banks are assessed at 5.82% while that for foreign banks are at 4.90% down from 7.90% and 5.40% in January.
RBI said banking system level capital adequacy ratio holds up well moderating by just 30 basis points between March 2021 and March 2022 under the baseline scenario and by 130 basis points and 256 basis points, respectively, under the two stress scenarios.
“All 46 banks would be able to maintain CRAR well above the regulatory minimum of 9% as of March 2022 even in the worst case scenario. The common equity Tier I (CET-1) capital ratio of banks may decline from 12.78% in March 2021 to 12.58% under the baseline scenario and further to 11.76% and 10.73%, respectively, under the medium and severe stress scenarios by March 2022,” RBI said.
The bi annual report released by the central bank checks the resilience of bank balance sheets to unforeseen shocks emanating from the macroeconomic environment over the next one year through hypothetical stress tests.
The results show that banks have enough capital buffers to deal with defaults. “Even under adverse scenarios, no bank is expected to face a decline of CET-1 capital ratio below the regulatory minimum of 5.5% (excluding capital conservation buffer)…Bank-level stress test results show that under the second level shock scenario, 14 banks with a share of 39% in banks’ total assets may fail to maintain the regulatory minimum level of CRAR. The CRAR would fall below 7% in case of 10 banks and 10 banks would record a decline of over six percentage points in the CRAR. In general, private sector and foreign banks would face lower erosion in their CRARs than PSBs under both scenarios,” RBI said.
In the extreme scenario of the top three individual borrowers of the banks under consideration failing to repay, no bank will face a situation of fall in CRAR below the regulatory requirement of 9% although 37 banks would experience a decline of more than a percentage point in their capital adequacy.
In a scenario of sudden and unexpected withdrawals of around 15% of deposits along with the utilisation of 75% of unutilised portion of committed credit lines, 45 out of the 46 banks in the sample will remain resilient, using their high quality liquid assets for meeting day-to-day liquidity requirements.
RBI guaged liquidity risk by asusming increased withdrawals of un-insured deposits and a simultaneous increase in usage of the unutilised portions of sanctioned working capital limits as well as utilisation of credit commitments and guarantees extended by banks to their customers.Internet Explorer Channel Network