The Reserve Bank of India's (RBI) macro stress tests shows the gross non-performing assets (NPAs) of commercial banks to jump from 9.3 per cent in September 2019 to 9.9 per cent in the next one year.
This finding is based on a baseline scenario which assumes the continuation of the current economic situation in the future. The GDP is down to 4.5 per cent in the second quarter of financial year 2019-20, and is expected to hover around 5 per cent for the entire fiscal.
"This is primarily due to change in macroeconomic scenario, marginal increase in slippages and the denominator effect of declining credit growth," says RBI in its Financial Stability Report.
So which category of banks would be most impacted? No prizes for guessing! The public sector banks, that control two-third of the banking sector in terms of deposits and advances, would see their NPAs increase to 13.2 per cent by September 2020, from 12.7 per cent in September 2019. The private banks, however, may see their NPAs increase to 4.2 per cent from 3.9 per cent in the same period. The foreign banks, which control less than 5 per cent of the total banking assets, will see NPAs rise to 3.1 per cent from 2.9 per cent during this one year period.
The asset quality deterioration will also have a direct impact on the capital ratios. The RBI report says the capital adequacy ratio of 53 banks is projected to decline to 14.1 per cent by September 2020 from 14.9 per cent in September 2019. In fact, there will be as many as three banks that would see their capital adequacy falling below the minimum regulatory level of 9 per cent by September 2020. This is while assuming no further capital is infused into these banks.
However, if macroeconomic conditions further deteriorate, five commercial banks may see their capital adequacy slip below 9 per cent. Fall in capital adequacy is one of the for the RBI to consider bringing the bank under its prompt corrective action (PCA) framework.
Currently, credit growth in the industry has already weakened because of slowdown in key sectors of the economy, especially real estate, construction, auto, etc. The loans and advances have slowed from 13.2 per cent in March 2019 to 8.7 per cent in September 2019. In recent past, retail growth actually compensated for the loss in corporate lending growth, but slowdown in some key retail assets like auto and real estate is now impacting the retail assets story. In fact, there are also concerns around the asset quality in retail because of job losses, stagnant income and no job creation in the economy.
According to the RBI report, the credit growth of PSBs has declined to 4.8 per cent year-on-year in September 2019, from 9.6 per cent in March 2019. The credit growth of private sector banks has moderated to 16.5 per cent from 21 per cent. Most of the private banks are retail-focused and have profited in the recent past at the cost of the PSBs. Meanwhile, many private banks have either raised new capital or are in the process of raising capital. The new leadership at the private bank is also stabilizing with a brand new strategy to prepare for the future growth.