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  1. Stress tests show banking system vulnerable: FSR

Stress tests show banking system vulnerable: FSR

Although stress tests conducted on the banking system reveal resilience, a sharp deterioration of macroeconomic conditions could make the system vulnerable, the Financial Stability Report (FSR) released on Wednesday indicated

By: | Updated: December 24, 2015 2:29 AM

Although stress tests conducted on the banking system reveal resilience, a sharp deterioration of macroeconomic conditions could make the system vulnerable, the Financial Stability Report (FSR) released on Wednesday indicated.

FSR reflects the collective assessment of the sub-committee of the Financial Stability and Development Council (FSDC) which is chaired by the governor of the Reserve Bank of India (RBI) Raghuram Rajan.

The stress test consists of a baseline macroeconomic scenario and two adverse scenarios which were derived based on up to one standard deviation (SD) for medium risk and up to two standard deviations for severe risk.

Under the baseline scenario, the gross non-performing assets (GNPA) ratio for scheduled commercial banks (SCBs) may rise to 5.4% by September 2016 from 5.1% in September 2015, but could subsequently improve to 5.2% by March 2017.

stress

However, if the macroeconomic conditions deteriorate, the GNPA ratio could rise to around 6.9% by March 2017 under a severe stress scenario. The system level CRAR of SCBs could also decline to 10.4% by March 2017 from 12.7% as of September 2015.

The report further added that public sector banks (PSB) might continue to register the highest GNPA ratio. Under a severe stress scenario, the GNPA ratio of PSBs may increase to 8% by March 2017 compared to 5.8% under the baseline scenario. For private banks, the GNPAs could rise to 4.9%

by March 2017 compared to the 2.5% under the baseline scenario.

From a sectoral perspective, the FSR finds that engineering sector could see the GNPA ratio moving up to 14.5% by March 2017 from the September 2015 level of 8.5%. This could be followed by the iron & steel and cement sectors.

Bank-wise estimates of unexpected losses and expected shortfalls of 60 select banks show that 19 banks—having 36.2% share in the total advances—were unable to meet their expected

losses with their existing provisioning.

However, there were five banks which were expected to have higher unexpected losses than their total capital. These banks have 2.4% share in the total advances of select banks.

A liquidity risk analysis shows that though there will be liquidity pressure under the stress scenarios, most banks can withstand sudden and unexpected withdrawals of around 25% of deposits along with the utilisation of 75% of their committed credit lines with the help of their statutory liquidity ratio (SLR) investments.

The FSR also published a contagion analysis which estimates the potential loss that could happen in the event of failure of one or more banks. The analysis was conducted with the top net borrowers and net lenders as trigger banks.

The failure of the top net borrower bank could result in a loss of 33.3% of Tier-I capital of the banking system (under the joint solvency liquidity contagion) while the failure of the top net lender bank could result in a loss of 35.3% of Tier-I capital, subject to certain assumptions made with regard to contagion, according to the FSR.

Interestingly, the failure of the third among the net borrower banks, resulted in a more severe loss than

the failure of the top net borrower bank due to the greater connectivity of this bank.

The FSR also showed that the share of off-balance sheet exposures of SCBs in their total assets have recorded a declining trend in the recent past. Foreign banks continued to have a very high share of off-balance sheet assets in their total assets as compared to other bank groups, it said.

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