Bad Loans: RBI plays catch-up on NPA forecasts, gets it wrong consistently

By: | Updated: January 2, 2019 2:58 AM

The December 2015-March 2016 period coincided with the RBI’s asset quality review (AQR), a system-wide exercise that led to improved recognition of bad loans and a massive spurt in slippages at banks.

In his foreword to the December 2018 FSR, RBI governor Shaktikanta Das said that after a prolonged period of stress, the banking sector now seemed to be on the path to recovery.

The actual gross non-performing asset (GNPA) ratio of the banking system overshot the quarter-ahead projections made by the Reserve Bank of India (RBI) for scenarios of severe stress five out of six times since FY16, shows an analysis of the past editions of the central bank’s Financial Stability Report (FSR).

Between June 2015 and December 2017, the actual GNPA ratio of scheduled commercial banks (SCBs) came in below the RBI’s severe-stress projection for the quarter ahead only in March 2017. GNPAs as a share of bank loans stood at 9.6% at the end of March 2017, well below the RBI’s baseline projection of 9.8% in the December 2016 edition of the FSR.

The June 2018 edition of the report contained no projections with respect to asset quality by the end of September 2018. Under the baseline scenario, it estimated the GNPA ratio at the end of March 2019 at 12.2%, up from 11.6% at the end of March 2018. The December 2018 edition, released on Monday, revised the number downwards to 10.3% for March 2019 under the baseline scenario and 10.8% in a scenario of severe stress — at par with the September 2018 GNPA ratio.

The widest divergence during the period under review was for the quarter ended March 2016, when at 7.6%, the actual GNPA ratio came in a full 250 basis points (bps) higher than the central bank’s projection for a scenario of severe stress. The December 2015-March 2016 period coincided with the RBI’s asset quality review (AQR), a system-wide exercise that led to improved recognition of bad loans and a massive spurt in slippages at banks.
According to the latest edition of the RBI’s half-yearly report, the baseline scenario assumes specific rates in future.

The adverse scenarios are derived based on standard deviations in the historical values of each of the macroeconomic variables separately, that is, univariate shocks: up to one standard deviation (SD) of the respective variables for medium risk and 1.25 to 2 SD for severe risk (10 years’ historical data). The horizon of the stress tests is one year.

In his foreword to the December 2018 FSR, RBI governor Shaktikanta Das said that after a prolonged period of stress, the banking sector now seemed to be on the path to recovery. “Stress test results suggest further improvement in NPA ratio, though its current level remains still high for comfort. Notwithstanding the significant costs wrought by the enhanced recognition of asset impairment in PSBs, it appears to have led to a greater discipline in credit assessment, higher sensitivity to market risk and better appreciation of operational risks,” he observed.

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