The Reserve Bank of India (RBI) says that the Indian banks' financials are likely to be impacted in terms of asset quality and future income in 2020-21.
The reason being lifting of the loan moratorium, closure of restructuring window soon and the possible lifting of asset quality standstill, which actually saved the banks so far from higher provisioning because of COVID-19 relief.
The RBI has made these observations in its report on trend and progress of banking in 2019-20.
"Going forward, banks will have to adapt and adjust to the rapidly evolving economic landscape due to these challenges and also the entry of niche players and emerging financial technologies," says the RBI report.
In 2019-20, the profits of commercial banks have turned around after incurring losses in two consecutive years. However, the public sector banks (PSBs) continued their losses for the fifth year in a row. At the system level, the banks' return on assets (RoA) and return on equity (RoE) also turned positive during 2019-20.
The moderation in the gross NPAs, which started after the peak in March 2018, continued through 2019-20 and 2020-21 so far, to reach 7.5 per cent by September-end 2020. These encouraging NPA numbers are a result of lower slippages which declined to 0.74 per cent in September 2020 and resolution of a few large accounts through the IBC process.
However, the accretion to NPAs as per RBI's income recognition and asset classification norms would have been higher in the absence of the asset quality standstill provided as a COVID-19 relief measure. "Given the uncertainty induced by COVID-19 and its real economic impact, the asset quality of the banking system may deteriorate sharply, going forward," warns RBI.
In terms of capital, although Indian banks had comparatively stronger capital buffers while entering the global financial crisis in 2008, they have significantly weaker capital position in comparison to their global counterparts in the COVID-19 pandemic. This is again one of the concerns as COVID losses or NPAs would come out only after the end of the restructuring window.
In addition, the share of unsecured lending in the portfolio of both banks and non-banks has increased sharply over the last three years. In recent years, the banks have been reorienting their loan book away from the industrial sector and towards retail loans in view of lower delinquency rates of the latter.
"The growing share of unsecured credit card loans of banks is up from 3.1 per cent per cent to 5.2 per cent within a span of five years - does not, however, augur well for their risk profile," says the RBI report.