Passing stress test


Despite concerns, the asset quality of the Indian banking system has continued to improve. According to the Reserve Bank of India’s latest financial stability report, gross non-performing loans (GNPAs) of the banking system have declined from 7.4 per cent in March 2021 to a six-year low of 5.9 per cent in March 2022. While public sector banks continue to be more stressed than private banks — for the former, bad loans stood at 7.6 per cent of advances, while for the latter, the figure is lower at 3.7 per cent — the improvement is broadbased. Alongside, banks have also witnessed an improvement in their capital position, with the capital to risk weighted assets ratio rising to 16.7 per cent at the end of March 2022. This is good news. It is also comforting that the central bank’s stress tests indicate that banks are well capitalised and are “capable of absorbing macroeconomic shocks even in the absence of any further capital infusion by stakeholders.”

Data presented in the report shows that banks have seen an improvement in their asset quality across all major sectors. Bad loans have declined even in sectors such as engineering goods, gems and jewellery, and construction — sectors where they have been significantly elevated in the past. And even as fresh slippages into the bad loan category have declined, banks have been increasing their provisioning for bad loans. Further, the restructuring of loans under the resolution framework was at only 1.6 per cent of total advances in December 2021. The RBI report also shows that the share of large borrowers in the banks’ loan portfolio has been declining, falling to less than 48 per cent of banks total advances, indicating a “reduction in concentration and diversification of borrowers”. Bad loans of these large borrowers have also declined to 7.7 per cent of advances at the end of March 2022. As a consequence, their share in bad loans of all banks stood at 62.3 per cent in the second half of 2021-22, much lower than the levels witnessed in September 2020. However, the continuous rise in the SMA-0 and SMA-1 categories (loans where the principal or interest payment is overdue for upto 30 days are characterised as SMA-0, while where they are due between 31 to 60 days are SMA-1) requires close monitoring.

The central bank has also conducted stress tests to gauge the strength of banks’ balance sheets against macroeconomic shocks. Under a baseline scenario, it estimates that banks’ bad loans may fall further to 5.3 per cent by March 2023. If the macroeconomic environment worsens, bad loans may rise to 6.2 per cent in a medium stress scenario, deteriorating to 8.3 per cent in a severe stress scenario. However, even under the severely stressed macroeconomic environment, the RBI doesn’t expect the capital position of any of the banks to fall below the minimum regulatory requirements.

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