Indian banking industry may see 14.8% of their assets non-performing under a severe stress scenario by September 2021, according to the Financial Stability Report released by the Reserve Bank of India. This would be relative to the 7.5% of non-performing assets of all banks as of September 2020.
Under such a scenario, 17.6% of the assets of public sector banks (PSBs), 8.8% of the assets of private banks (PVBs) and 6.5% of the assets of foreign banks (FBs) bank may culminate into non-performing assets.
As of September 2020, the non-performing assets of PSBs, PVBs and FBs stood at 9.7%, 4.6% and 2.5% respectively.
The severe stress scenario is one of the three scenarios presented by the RBI to model hypothetical adverse conditions affecting the Indian banking system as it reels from the aftermath of the impact COVID-19 had on the Indian economy. Regardless of the scenario, the asset quality of Indian banks is shown to exacerbate in the first half of the next financial year (FY22).
The baseline scenario has the best outcome of these three. The Indian banking system would see a 13.5% non-performing asset ratio, with the ratios for PSBs, PVBs and FBs being at 16.2%, 7.9% and 5.4% respectively.
The medium scenario is better than the severe stress scenario but worse than the baseline. The assets of the banking system as a whole would be 14.1% under stress. The non-performing asset ratios for PSBs, PVBs and FBs would be 16.8%, 8.2% and 6% respectively.
But these ratios are not written in stone.
"A caveat is in order, though: considering the uncertainty regarding the unfolding economic outlook, and the extent to which regulatory dispensation under restructuring is utilised, the projected ratios are susceptible to change in a nonlinear fashion", the report adds.
In the foreword penned by Governor Shaktikanta Das says, "Congenial liquidity and financing conditions have shored up the financial parameters of banks, but it is recognised that the available accounting numbers obscure a true recognition of stress.
However, he also says that Indian banks have faced the pandemic with a relatively sound capital situation and liquidity capital buffers which is built in the aftermath of the financial crisis supported by regulation measures.
GDP growth under the three scenarios
While the RBI has considered these stress scenarios for the banking, it has also put out how real gross domestic product growth (GDP growth) would pan out under these three scenarios for the second half of the ongoing financial year (October 2020 to March 2021), and the first half of the next financial year (April to September 2021).
This year, under a baseline scenario, there will be no growth, neither will there be a decline. In the second half, the economy would decline 2.1% in a medium stress scenario and 7.6% for a severe stress scenario.
Officially, for the full year (FY21), the RBI has estimated that the economy would decline 7.5% in its December monetary policy announcement. This is much better from what the RBI initially estimated in October, where they said that the economy would decline 9.5%.
For the first half of the next financial year, that is until 2021, a baseline scenario yields the best results and the economy would growth 14.2%. Under a medium stress scenario, growth would still be a substantial 9.4%. But under severe stress, it would be 3.8%.
FY22 growth estimates by most research houses is generally high, in the double-digits or close, owing to a base effect.
Read the RBI's report here.