The system level capital to risk-weighted assets ratio (CRAR) is projected to drop to 14% in September 2021 from 15.6% in September 2020 under the baseline scenario and to 12.5% under the severe stress scenario.
Macquarie has significantly raised earnings estimates -- by 16-35% for private banks for the financial year 2022 and 2023; and by 80-150% for PSU banks.
Loan losses in the banking sector, as measured by the gross non-performing asset (GNPA) ratio, could nearly double to 13.5% by September 2021 in a baseline scenario, and to as high as 14.8% in a severe-stress scenario resulting from the pandemic, the Reserve Bank of India (RBI) said on Monday. The GNPA ratio stood at 7.5% in September 2020.
Were the scenario of severe stress to materialise, the bad loan ratio of the banking system could be the highest since March 1997, when it stood at 15.7%, according to historical data from the RBI.
“Domestically, corporate funding has been cushioned by policy measures and the loan moratorium announced in the face of the pandemic, but stresses would be visible with a lag,” the central bank observed in the December 2020 edition of its financial stability report (FSR).
The GNPA projections are indicative of the possible economic impairment latent in banks’ portfolios, with implications for capital planning. “A caveat is in order, though: considering the uncertainty regarding the unfolding economic outlook, and the extent to which regulatory dispensation under restructuring is utilised, the projected ratios are susceptible to change in a non-linear fashion,” the RBI said.
RBI governor Shaktikanta Das observed India’s banking system faced the pandemic with relatively sound capital and liquidity buffers built assiduously in the aftermath of the global financial crisis and buttressed by regulatory and prudential measures. “Notwithstanding these efforts, the pandemic threatens to result in balance sheet impairments and capital shortfalls, especially as regulatory reliefs are rolled back.
In addition, banks will be called to meet the funding requirements of the economy as it traces a revival from the pandemic,” Das said. Consequently, maintaining the health of the banking sector remains a policy priority and preservation of the stability of the financial system is an overarching goal.
With stress tests pointing to a deterioration in asset quality of banks, early identification of impairment and aggressive capitalisation is imperative for supporting credit growth across various sectors alongside pre-emptive strategies for dealing with potential NPAs, the report highlighted.
The system level capital to risk-weighted assets ratio (CRAR) is projected to drop to 14% in September 2021 from 15.6% in September 2020 under the baseline scenario and to 12.5% under the severe stress scenario. The stress test results indicate that four banks may fail to meet the minimum capital level by September 2021 under the baseline scenario, without factoring in any capital infusion by stakeholders. In the severe stress scenario, the number of banks failing to meet the minimum capital level may rise to nine, the RBI said.
The common equity tier-I (CET-1) capital ratio of SCBs may decline to 10.8% from 12.4% in September 2020 under the baseline scenario and to 9.7% under the severe stress scenario in September 2021. Furthermore, under these conditions, two banks may fail to meet the minimum regulatory CET-1 capital ratio of 5.5% by September 2021 under the baseline scenario; this number may rise to five in the severe stress scenario. At the aggregate level, SCBs have sufficient capital cushions, even in the severe stress scenario facilitated by capital raising from the market and, in case of PSBs, infusion by the government. At the individual level, however, the capital buffers of several banks may deplete below the regulatory minimum. Hence, going forward, mitigating actions such as phase-wise capital infusions or other strategic actions would become relevant for these banks from a micro-prudential perspective, the report said.