High-frequency data show that sectors such as real estate continue to suffer from poor demand, leaving inventories high, while stalled capacity in the power sector remains high at around 25,000 MW.
Even before the Reserve Bank of India (RBI) highlighted the rising stress on banks’ books in H1FY20, it had been evident that the non-performing assets (NPA) cycle may not quite have come to an end. The reality is that several sectors—power, real estate, NBFCs, telecom, and MSMEs—are not recovering as fast as they should be. Therefore, lenders remain vulnerable to defaults by borrowers. That apart, given how the economy continues to decelerate, with growth having crashed to a six-year low of 4.5% year-on-year (y-o-y) in Q2FY20, borrowers in other segments, too, could delay repayments. Not surprising, then, that macro-stress tests for credit risk show that under the baseline scenario, the gross NPA ratio for banks may increase from 9.3 in September 2019 , to 9.9 by September 2020. These are per the central bank’s findings in the latest Financial Stability Report (FSR). The fact is gross NPAs are increasing on an absolute basis. For state-owned lenders, these are projected to rise to 13.2% by September 2020, from 12.7% in September 2019, while for private sector banks, the increase forecast is a more modest 30 basis points to 4.2%.
RBI attributed the possible increases in bad loans to a change in the macroeconomic scenario, marginal increase in slippages, and the denominator effect of declining credit growth. The question is, how much of a deceleration in growth has RBI pencilled in because the forecasts have been made for a baseline scenario that assumes the current economic situation will continue? However, growth could well decelerate in the coming quarters, pressuring other parameters. Moreover, what is more pertinent is how well the sectors that banks are more exposed to are faring.
High-frequency data show that sectors such as real estate continue to suffer from poor demand, leaving inventories high, while stalled capacity in the power sector remains high at around 25,000 MW. Of the 40,000 MW of stressed thermal capacity—to which banks have an exposure of Rs 2 lakh crore—resolutions have been found for just 12,000 MW. Lenders’ exposures to NBFCs remain under a cloud because the experience with IBC has revealed that the level of recovery can be very low.
In fact, the FSR draws from an industry report on emerging trends in consumer credit to say that the environment for NBFCs remains challenging. Pointing out this is relevant because there has been a sharp rise in delinquencies in the commercial credit segment. What is also worrying is that with rising loan losses and the need for more provisioning, capital adequacy for a group of 53 banks is projected to drop to 14.1% by September 2020, from 14.9% right now; if the macro environment deteriorates, five scheduled banks could see their capital adequacy ratio fall to below 9%.