Banks' gross non-performing assets may rise to 13.5% by September 2021, from 7.5% in September 2020 under the baseline scenario, according toFinancial Stability Report (FSR) released by the Reserve Bank of India.
Context
- Banks' gross non-performing assets may rise to 13.5% by September 2021, from 7.5% in September 2020 under the baseline scenario, according toFinancial Stability Report (FSR) released by the Reserve Bank of India.
Key findings of the report related to NPA
- If the macroeconomic environment worsens into a severe stress scenario, the GNPA ratio may escalate to 14.8%.
- Public sector banks' (PSBs) GNPA ratio of 9.7% in September 2020 may rise to 16.2% by September 2021 under the baseline scenario.
- The gross non-performing asset (GNPA) ratio of private sector banks (PVBs) and foreign banks (FBs) may increase from 4.6% and 2.5% to 7.9% and 5.4%, respectively, over the same period.
Key Highlights of the Financial Stability Report
- COVID- 19: In the initial phase of the COVID-19 pandemic, policy actions were geared towards restoring normal functioning and mitigating stress. Positive news on vaccine development has underpinned optimism on the outlook, though it is marred by second wave of the virus including more virulent strains.
- Domestic markets and financial institutions:Policy measures by the regulators and the government have ensured the smooth functioning of domestic markets and financial institutions. The movements in certain segments of the financial markets are not in sync with developments in the real sector.
- Bank Credits:Bank credit growth has remained subdued, with the moderation being broad-based across bank groups.
- CRAR and NPAs:The capital to risk-weighted assets ratio (CRAR) of Scheduled Commercial Banks (SCBs) improved to 15.8 per cent in September 2020 from 14.7 per cent in March 2020. Macro stress indicates that the GNPA ratio of all SCBs may increase from 7.5 per cent in September 2020 to 13.5 per cent by September 2021 under the baseline scenario; the ratio may escalate to 14.8 per cent under a severe stress scenario.
- Risk to banking systems:With the inter-bank market continuing to shrink and with better capitalisation of banks, the contagion risk to the banking system under various scenarios declined as compared to March 2020.
Significance of the findings
- These GNPA projections are indicative of the possible economic impairment latent in banks' portfolios.
- It shows the implications for capital planning.
Non-Performing Assets (NPA)
- A non-performing asset (NPA) is a classification used by financial institutions for loans and advances on which the principal is past due and on which no interest payments have been made for a period of time.
- In general, loans become NPAs when they are outstanding for 90 days or more, though some lenders use a shorter window in considering a loan or advance past due.
Categories of NPA
- Standard Assets: They are NPAs that have been past due for anywhere from 90 days to 12 months, with a normal risk level.
- Sub-Standard Assets: They are NPAs that have been past due for more than 12 months. They have a significantly higher risk level, combined with a borrower that has less than ideal credit.
- Doubtful Debts: Non-performing assets in the doubtful debts category have been past due for at least 18 months.
- Loss Assets: These are non-performing assets with an extended period of non-payment. With this class, banks are forced to accept that the loan will never be repaid, and must record a loss on their balance sheet.
|
What is Financial Stability Report (FSR)?
- The Financial Stability Report (FSR) is published biannually.
- It includes contributions from all the financial sector regulators.
- It reflects the collective assessment of the Sub–Committee of the Financial Stability and Development Council (FSDC-SC) on risks to financial stability
