Bad loans of Indian banks are expected to spike to 12.5 per cent of outstanding credit by March 2021, according to the Reserve Bank of India, as borrowers' ability to repay loans has been severely hit due to coronavirus impact. The gross non-performing asset (GNPA) ratio of Scheduled Commercial Banks (SCBs) stood at 8.5 per cent in March 2020, one of the highest among major economies.
The central bank warned that the GNPA ratio, which indicates the overall quality of the bank's loans, may further escalate to 14.7 per cent under a very severely stressed scenario.
"Macro stress tests for credit risk indicate that the GNPA ratio of all SCBs may increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021 under the baseline scenario; the ratio may escalate to 14.7 per cent under a very severely stressed scenario," the RBI said in its latest financial stability report.
The report said public sector bank's GNPA ratios may increase from 11.3 per cent in March 2020 to 15.2 per cent by March 2021, whereas for private banks it may climb to 7.3 per cent from 4.2 per cent, under the stress scenario.
The foreign banks' gross bad loan ratio may rise to 3.9 per cent from 2.3 per cent in March 2020.
"The capital to risk-weighted assets ratio (CRAR) of Scheduled Commercial Banks (SCBs) edged down to 14.8 per cent in March 2020 from 15.0 per cent in September 2019, while their gross non-performing asset (GNPA) ratio declined to 8.5 per cent from 9.3 per cent and the provision coverage ratio (PCR) improved to 65.4 per cent from 61.6 per cent over this period," the RBI report said.
The report noted that bank credit, which had considerably weakened during the first half of 2019-20, declined further in the subsequent period with the moderation becoming broad-based across bank groups. Going forward, the banks will face major challenges including pandemic-proofing large sections of society, especially those that tend to get excluded in formal financial intermediation, it added.
The overleveraged non-financial sector, simmering global geopolitical tensions, and economic losses on account of the pandemic are major downside risks to global economic prospects, the report said.
"Network analysis reveals that total bilateral exposures among entities in the financial system declined marginally during 2019-20; with the inter-bank market continuing to shrink and with better capitalisation of public sector banks (PSBs), there would be reduction in contagion losses to the banking system under various scenarios in relation to a year ago," the RBI said in its report.
The RBI report said that the monetary and regulatory measures taken by the financial sector regulators and the government to mitigate the impact of COVID-19 eased operational constraints and helped in maintaining market integrity and resilience in the face of severe risk aversion.