Asset quality at Indian banks could continue to improve if prevailing macroeconomic conditions keep playing out, the RBI said in a report.
The gross non-performing asset ratio at Indian banks is projected to improve by 30 basis points to 3.6% by March 2024, according to the Reserve Bank of India's baseline projections in the financial stability report released on Wednesday. The overall gross NPA ratio at banks stood at 3.9% in FY23.
The net NPA ratio for banks improved to 1% as of March 2023, as compared with 6.1% as of March 2018.
"Stress test results reveal that (scheduled commercial banks) are well-capitalised and capable of absorbing macroeconomic shocks over a one-year horizon, even in the absence of any further capital infusion," the report said.
While the stress tests signal improvement in asset quality under prevailing economic conditions, if the scenario worsens to medium or severe stress, the gross NPA ratio may rise to 4.1% and 5.1%, respectively.
A twin shock in the form of a simultaneous rise in inflation and lending rates can put even households with sustainable repayment capacity at risk and double the loans at risk, the report said.
Although overall NPA levels have registered a fall, there has been an increase in SMA-1 loans, belonging to borrowers that have taken loans above Rs 5 crore. SMA-1 loans are loans that have been wholly or partly overdue for 31 to 60 days.
SMA-1 loans belonging to big borrowers grew by 38.7% quarter-on-quarter in March 2023. This also coincides with a sequential reduction of 8.1% in non-performing assets for such accounts and a 57% decline in SMA-2 assets. SMA-2 assets are loans that have been wholly or partly overdue for 61 to 90 days.
"The asset quality of top 100 borrowers improved, with their share in SCBs' (scheduled commercial banks) GNPA declining from 6.8% as of March 2022 to 1.6% as of March 2023," the report said.
Retail-Led Growth
Credit for agriculture, services, and personal loans has grown faster than overall credit to the industrial sector, the report said.
Personal loans—in particular—recorded a broad-based year-on-year growth of 22.2% in March 2023. All major segments under personal loans—housing, credit card receivables, vehicle loans, education loans—have registered robust growth.
Although there has been an overall improvement in asset quality for the banking system, impairments in the credit card segment have risen marginally.
For public sector banks, the GNPA ratio for credit card receivables stood at 18% in March 2023, as compared with 1.9% and 1.8% for private banks and foreign banks, respectively. The share of credit card debt for public sector banks is also significantly smaller as compared with private banks or foreign banks.
While credit card debt given out by private banks made up 10.1% of total personal loans, it comprised 0.1% share of total personal loans given by public sector banks. Credit card debt from foreign banks accounts for 15.3% of total personal loans, according to the report.
Withstanding Stress
RBI's stress tests also measure the credit risk sensitivity of banks. A reverse stress test conducted by the central bank showed that a shock of gross NPA ratios rising by 6 standard deviations would be required to lower the system-level Capital to Risk (Weighted) Assets Ratio below the regulatory minimum of 9%. The system-level CRAR ratio stood at 17.1% as of March 2023.
Standard deviations are a statistical tool used to measure the dispersion of data. A six-degree standard deviation in gross NPAs would refer to an extreme departure from prevailing values.
Overall, macro-stress tests conducted by the RBI indicate that Indian banks have enough capital buffers to withstand moderate to severe economic stress, the report said. However, some individual banks may fall below minimum capital requirements in a severe stress scenario, it said.
"As global financial conditions and the geopolitical situation remain highly uncertain, the Indian financial system needs to adopt a nimble and preemptive approach to ward off any signs of incipient stress," the report said.
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