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Banks’ asset quality may get dented, going forward, as incipient stress remains in the form of increased proportion of restructured advances (RSA) and the possibility of higher slippages arising from sectors that were relatively more exposed to the Covid pandemic, cautioned the Reserve Bank of India (RBI).
In the case of non-banking finance companies (NBFCs), too, the central bank warned, in its Report on Trend and Progress of Banking in India 2020-21 that the sector may have to grapple with higher delinquency as and when policy measures unwind.
Within banks’ standard assets, the share of RSA has increased to 1.8 per cent at end September 2021 (from 0.8 per cent as at end-March 2021) due to the restructuring scheme 2.0 for retail loans and MSMEs which does not entail an asset classification downgrade, the report said.
Stress signals
Further, special mention accounts-2 (SMA-2, where the principal or interest payment is overdue for 61-90 days) ratio, which signal impending stress, have risen across bank groups since the outbreak of the pandemic.
Bolstering capital base
Referring to credit pick up starting in Q2 (July-September) 2021-22, with the economy emerging out of the shadows of the second wave of Covid-19, the RBI observed that going forward, a revival in bank balance-sheets hinges around overall economic growth, which is contingent on progress on the pandemic front.
However, banks would need to further bolster their capital positions to absorb potential slippages as well as to sustain credit flows, especially when monetary and fiscal measures unwind.
Although most of the regulatory relaxation measures have run their course, the full extent of their impact on banking is yet to unravel, the report noted.
As support measures start unwinding, some of these restructured accounts might require higher provisioning by banks over the coming quarters, the RBI said.
Bad loans moderate
Provisional supervisory data suggest a moderation in the Gross Non-Performing Assets (GNPA) ratios of banks to 6.9 per cent by end-September 2021 from 7.3 per cent by March-end 2021.
During 2020-21, this improvement was driven by lower slippages, partly due to the asset classification standstill, per the Report.
The RBI said: “With some of the Reserve Bank’s measures reaching pre-set sunset dates in 2021-22, liquidity has been wound down partly, while several regulatory measures have been realigned to avoid extended forbearance and risks to financial stability.
“As the economy revives, renewed focus may need to be placed on building up of adequate buffers and being vigilant of the evolving risks.”
Balancing act
The central bank said that the trade-off between short-term liquidity and regulatory support to viable borrowers and medium-term macro-financial stability risks needs to be carefully balanced.
The report said: “Looking ahead, it is important for the credit cycle to gain traction and support the ensuing economic recovery.
This will require policy initiatives that ensure effective risk management and sound corporate governance.”
The RBI underscored that credit growth is muted, indicative of pandemic scarring on aggregate demand as also risk aversion of banks.
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