RBI's Financial Stability Report Sees Bank Bad Loans Falling In FY23

Bank bad loans estimated to go down, unless macroeconomic conditions worsen, says the RBI's financial stability report.

<div class="paragraphs"><p>Outside the Reserve Bank of India's office.&nbsp;(Source: BQ Prime)</p></div>
Outside the Reserve Bank of India's office. (Source: BQ Prime)

Gross bad loans of scheduled commercial banks may fall in the ongoing fiscal under a baseline stress scenario, according to the Reserve Bank of India.

Under the baseline scenario, the gross non-performing asset ratio for the banking system may drop to 5.3% by March 2023 from 5.9% in March 2022, the regulator said in its latest financial stability report. This is in case of no further regulatory reliefs and without considering sale of bad loans to National Asset Reconstruction Co. this year.

The asset quality for banks improved across all major sectors in FY22.

“There was a broad-based improvement in the GNPA ratio in respect of the industrial sector, though it remained elevated for gems and jewellery and construction sub-sectors,” the RBI said in its report.

If the level of macroeconomic stress were to go up, however, the bad loans could worsen to 6.2% under a medium stress scenario and to 8.3% under severe stress, the RBI said.

The RBI said in the current financial stability report, the macro-stress testing framework has been modified, predominantly by integrating a wider set of macroeconomic and macro-financial indicators in the models. Some of these indicators include private financial consumption indicator growth, export to gross domestic product ratio, and gross value added growth for industry and services sectors.

At the bank group level, too, the gross NPA ratios may shrink by March 2023 in the baseline scenario. But under severe stress, public sector banks may see their bad loan ratios worsen to 10.5% at the end of the current fiscal from 7.6% as of March 2022. Private banks’ gross bad loans may rise to 5.7% from 3.7% in the same duration.

About accounts recast under the RBI’s second Covid-19 restructuring framework introduced last year, the regulator said the level of these loans had risen. Loans restructuring under the second framework stood at 1.6% of total advances as of December 2021 compared with 1% in the first iteration of the restructuring framework in 2020.

Restructured assets constituted 2.4% each of the advances under micro, small and medium enterprises and retail sectors.

For public sector banks, total loans restructured under the second framework stood at 1.9% of their total advances compared with 1.4% for private peers.