Stress tests of scheduled commercial banks show that their gross non-performing assets (GNPA) ratio may increase
The Reserve Bank of India’s (RBI) Financial Stability Report (FSR) has said that the risks to the banking system remain elevated due to deterioration in the asset quality. The report said that sectors such as iron & steel, telecommunication, construction and engineering, power and telecom will be major bottlenecks with companies having a high leverage in 2017 and 2018, adding that fresh NPA accretion is expected from these sectors.
FSR cautioned that the stress tests of scheduled commercial banks show that their gross non-performing assets (GNPA) ratio may increase further if macroeconomic conditions deteriorate sharply.
But it held out hope for banks as many of them are cleaning up their balance-sheets and bringing down debt on their books; however their capital position may be insufficient to support a higher credit growth.
Total borrowings by companies in chemicals, computer, food products, hotel, rubber and textiles industries decreased during September 2015 to September 2016. On the other hand, cement, construction, electrical machinery, power, iron & steel, jewellery, mining, automobiles, papers, pharmaceuticals, real estate, telecommunications and transport industries contributed towards an increase in total borrowings.
Urjit Patel, RBI governor, in his foreword to the FSR, said, “The asset quality review of Indian banks and the subsequent corrective actions are steps in this direction. While the domestic banking sector continues to face significant levels of stress partly reflecting legacy issues, on balance, enhanced transparency has helped to reinforce the stability of India’s financial system.”
The report said the public sector banks (PSBs) may continue to register the highest GNPA ratio. A study initiated for the FSR sees the gross NPA ratio climbing to 12.5% in March 2017 and then to 12.9% in March 2018 from 11.8% in September 2016, which could increase further under a severe stress scenario.
Credit risk arising from exposure to the infrastructure sector (specifically power, transport and telecommunications) was examined through a sectoral credit stress test where GNPA ratio of the sector was assumed to increase by a fixed percentage point impacting the overall GNPA ratio of the /banking system. The results showed that shocks to the infrastructure segment will impact the profitability of banks considerably, with the most significant effect being on power and transport sectors.
The FSR also cautioned on the credit concentration risk that is large-scale lending to select borrowers. Stress tests on banks’ credit concentration risks, considering top individual borrowers according to their exposures, showed that the impact was significant for three banks, comprising about 3.9% of the assets. Default by the topmost borrower, the report said, could jeopardise the profitability of the bank to a large extent.
LOAN STRESS
In case of macroeconomic conditions deteriorating sharply, gross non-performing assets (GNPAs) ratio may increase further. Public sector banks may continue to register the highest GNPA ratio. Domestic banks reflect significant stress levels, as per the central bank’s report
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