“Worst is behind us, though the recovery path remains uncertain,” says Financial Stability Report

On Monday (11.01.2021), the Financial Stability and Development Council in its report bi-annual report said that Indian banks may see bad loans double despite signs of an improvement in the economic impact of the COVID-19 pandemic. The council is an umbrella group of regulators and releases the FSR report twice yearly to give a detailed overview of the financial stability and resilience of the Indian financial sector. This year the release of FSR was rescheduled to incorporate the first advance estimates of national income for 2020-21 that were released by the National Statistical Office on January 7, 2021.

The 22nd issue of the Financial Stability Report (FSR) highlighted the challenges to the capital position phase of the COVID-19 pandemic. The policy actions were geared in the initial phase towards restoring normal functioning and mitigating stress; the focus is now being oriented towards supporting the recovery and preserving the solvency of businesses and households, it said.

The report said that 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, while their gross non-performing asset (GNPA) ratio declined to 7.5 per cent from 8.4 per cent, and the provision coverage ratio (PCR) improved to 72.4 per cent from 66.2 per cent over this period. According to the assessment of the sub-committee of FSDC on risks to financial stability, and the resilience of the financial system, the gross Non-Performing Assets of banks may increase from 7.5% in September 2020 to 14.8% under a severe stress scenario. Even under a baseline scenario, it may rise to 13.5% by September 2021 it said. The worst is behind us, though the recovery path remains uncertain,” the report added. “This highlights the need for proactive building up of adequate capital to withstand possible asset quality deterioration”, it said.

 Bank credit growth has remained subdued, with the moderation being broad-based across bank groups, according to the report. The performance parameters of banks have improved significantly, aided by regulatory dispensations extended in response to the COVID-19 pandemic it said. The managing of market volatility amidst rising spillovers has become challenging especially when the movements in certain segments of the financial markets are not in sync with developments in the real sector, the report quoted. In terms of the Network, analysis reveals that total bilateral exposures among entities in the financial system increased marginally during the quarter ended September 2020. The report also mentioned that “With the inter-bank market continuing to shrink and with a better capitalization of banks, the contagion risk to the banking system under various scenarios declined as compared to March 2020”.