According to the Reserve Bank of India report on trends and progress of banking in India, 2020-21, released on Tuesday, the Indian banking system has weathered the Covid storm better than expected. The asset quality of banks has improved over the past year or so, and on several other financial metrics as well, both public and private sector banks are performing better than before. However, there is cause for concern. Even with the economy recovering to its pre-pandemic levels, the threat of omicron Despite this, the report suggests that banks should be “cautious of emerging risks”. In fact, according to the RBI’s Financial Stability Report released on Wednesday, banks may see an increase in bad loans in the coming year. In addition, the withdrawal of monetary and fiscal measures means that banks will need to “further strengthen their capital position to absorb potential slippages as well as maintain credit flows.”
At the aggregate level, the gross non-performing assets (GNPAs) of banks, which started declining before the pandemic, have continued their decline. Bad loans stood at 7.3 per cent at the end of March 2021, down from 8.2 per cent in the previous year. Gross NPAs had earlier reached 11.5 per cent in March 2018. Provisional data suggests a further moderation this year – a further decline in bad loans is projected to be 6.9 per cent at the end of September 2021. However, this reform is on account of not only less slippage, but mainly write-offs (banks write off bad loans worth Rs 2.08 lakh crore), and policy by the central bank to cushion the fallout from the pandemic. Measures such as asset classification are due for a deadlock. In fact, as per the data presented in the report, recovery from loans sourced through all channels – Lok Adalats, Debt Recovery Tribunals, SARFAESI Act and IBC has actually declined by 22 per cent (of the total amount involved) in 2019- 20 in 2020-21 at 14.1 percent.
On other financial indicators, banks have seen improvement over the past year – capital buffers are up, as are provision coverage ratios. However, there are signs of increasing tension. Loans classified as SMA-2 (Special Mention Accounts where principal or interest payment was overdue for 61-90 days) have increased, indicating impending stress. The tension in the MSME category is also increasing. Bad debts may actually turn worse in the coming months. According to the Financial Stability Report, GNPA is expected to increase to 8.1 per cent by September 2022 under the baseline scenario. If the economic outlook worsens, it could further increase to 9.5 per cent. Thus banks may require “higher capital inflows” to meet credit requirements and meet challenges. Ultimately, how fast credit flows to certain parts of the economy will impact recovery.
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