RBI says bank’s bad loan hit 10-year lows; GNPA could Improve

The Reserve Bank of India conducted stress tests to evaluate the ability of scheduled commercial banks (SCBs) to withstand macroeconomic shocks. The results indicate that the banks are adequately capitalized and possess the capacity to absorb such shocks for one year, even without requiring additional capital infusion. 

Based on the stress test results published in the Financial Stability Report (FSR), the projected aggregate Capital to Risk-Weighted Assets Ratio (CRAR) of 46 major banks is expected to decline from 17% in March to 16.1% by March 2024 under the baseline scenario. 

The financial stability report, which is published twice a year by the central bank, incorporates inputs from all financial sector regulators in the country. The report represents the combined evaluation of the Sub Committee of the Financial Stability and Development Council (FSDC-SC) regarding the existing and emerging vulnerabilities in the Indian financial system. 

In the medium-stress scenario, the Capital to Risk-Weighted Assets Ratio of the mentioned banks is projected to decrease to 14.7% by March 2024. In the severe stress scenario, it is expected to further decline to 13.3% by the same period. 

However, it is important to note that the CRAR would still remain above the minimum capital requirement, including the capital conservation buffer (CCB), which is set at 11.5%. 

According to the assessment by FSDC-SC, none of the 46 scheduled commercial banks are expected to violate the minimum capital requirement of 9% within the next year, even in a severely stressed scenario. However, it is projected that 7 SCBs may have a shortfall in meeting the minimum capital requirement, which includes the capital conservation buffer. 

Based on the stress test results, the gross non-performing assets (GNPA) ratio of all scheduled commercial banks is expected to improve to 3.6% by March 2024 under the baseline scenario, compared to the level of 3.9% recorded in March 2023. However, in the event of a medium or severe stress scenario arising from a worsened macroeconomic environment, the GNPA ratio may increase to 4.1% and 5.1% respectively. 

They observed that despite a challenging global macroeconomic situation, both the Indian economy and the domestic financial system display resilience. The committee stated the positive condition of the banking system in terms of improving profitability, asset quality, and adequate levels of capital and liquidity buffers.

The GNPA ratio of SCBs continued its downward trend, reaching a 10-year low of 3.9% in March 2023, while the net non-performing assets (NNPA) ratio decreased to 1.0%.

The provisioning coverage ratio (PCR) experienced an increase to 74.0%. This growth was driven by a strong expansion in net interest income and a substantial reduction in provisions. Consequently, the profit after tax of scheduled commercial banks (SCBs) witnessed a notable growth of 38.4% in the fiscal year 2022-23.

India’s credit-to-GDP gap has remained negative since March 2013, despite the recent upturn in bank credit growth. This signifies that credit absorption in India when compared to advanced and emerging market peers, continues to be relatively subdued.

According to the report, the improved health of balance sheets has contributed to a sustained and widespread acceleration in credit growth. This positive trend has resulted in enhanced credit flow across all sectors of the economy.