Ratios of stressed advances, GNPA converging, says RBI

By: | Updated: January 10, 2019 4:11 AM

The ratios of stressed advances as a share of all loans and gross non-performing assets (GNPAs) in the system are converging as a result of the February 12 circular, says the Reserve Bank of India’s (RBI) December 2018 Financial Stability Report (FSR).

RBI, GNPA, FSR, GNPA ratio, Stressed advancesThe February 12 circular, among other things, withdrew all existing restructuring schemes for stressed accounts and set down the insolvency route as the last resort for stress reduction if an account cannot be resolved by any other means.

The ratios of stressed advances as a share of all loans and gross non-performing assets (GNPAs) in the system are converging as a result of the February 12 circular, says the Reserve Bank of India’s (RBI) December 2018 Financial Stability Report (FSR). Stressed advances take into account NPAs and restructured standard advances. According to data in the report, the difference between the ratio of stressed advances and the GNPA ratio fell to 50 basis points (bps) at the end of September 2018 from around 390 bps at the end of March 2016. Indeed, even at the end of September 2017, the GNPA ratio was a full 200 bps lower than the stressed advances ratio of 12.2%. At the end of September 2018, the GNPA ratio stood at 10.8%, while the stressed-advances ratio was 11.3%.

The February 12 circular, among other things, withdrew all existing restructuring schemes for stressed accounts and set down the insolvency route as the last resort for stress reduction if an account cannot be resolved by any other means.
This resulted in accelerated recognition of a number of large stressed accounts as NPAs at the end of the March 2018 quarter because the older recast schemes were no longer propping them up as standard assets.

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“One result of the February 12 circular has certainly been an increased convergence between the stressed-advances and GNPA ratios,” said a senior executive at the central bank. “This means that the earlier trend of some bad assets remaining hidden behind restructuring schemes and emerging later to push up the NPA ratio has slowed.”

The latest edition of the FSR said that a macro stress test for banks indicates that under the baseline scenario, GNPAs may fall to 10.3% by March 2019 from 10.8% in September 2018. However, this result may not hold if some conditions change, such as the recent announcement of capital infusion into state-owned banks or the extension of a restructuring scheme for MSMEs announced by the central bank itself.

Another RBI official said the macro stress test cannot account for recapitalisation-induced spurts in system lending. “Part of the reason NPA ratios have overshot older stress-test results is increased credit growth. The lending we have seen in 2018 came on the back of the December 2017 round of recapitalisation,” he said, adding that there is a possibility of the MSME debt recast scheme having a similar effect on NPA ratios in the quarters ahead.

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