RBI sees Omicron threat to growth

Flagging Concerns

- Economy regaining strength and resilience from Q2

- But Omicron haunts the future

- Inflation remains a concern

- Need of stronger supply side measures

- Banks' gross NPAs may jump to 8.1-9.5% by Sept 2022 from 6.9% in Sept 2021

- Rising stress level in retail loan portfolio

Mumbai: Though the economy has steadily gained momentum and remained resilient since the second quarter of the current fiscal, the Omicron variant of Coronavirus remains the major challenge along with rising inflation pressures, says the Reserve Bank of India (RBI) in its second financial stability report on Wednesday.

In the foreword to the report released on Wednesday, RBI Governor Shaktikanta Das notes that after the destructive second wave in April-May 2021, the growth outlook has progressively improved, though there are headwinds from global developments and more recently from the Omicron virus.

A stronger and sustainable recovery hinges on the revival of private investment and shoring up private consumption, which unfortunately still remain below their pre-pandemic levels, he notes. Admitting that inflation remains a concern as it is by the build-up of cost-push pressures, Das has called for stronger supply-side measures to contain food and energy prices.

Noting that the financial institutions have remained resilient amidst the pandemic and stability prevails in the financial markets cushioned by policy and regulatory support, the governor is confident that the strong balance sheets of banks with higher capital and liquidity buffers will help mitigate future shocks.

Quoting the stress tests on banks, the governor has also warned that gross NPAs may jump to 8.1-9.5 per cent by September 2022 from 6.9 per cent in September 2021.

The governor concluded by reiterating the Reserve Bank's resolute commitment to ensure a robust and efficient financial system that supports strong, sustainable and inclusive growth with macroeconomic and financial stability.

Bad loans

Gross bad loans of banks may rise from 6.9 per cent in September 2021 to 8.1-9.5 per cent by September 2022 if the Omicron variant strikes the economy hard, as per the financial stability report.

The report also said that the rising stress level in the retail loan portfolio of banks -- the mainstay of bank credit for many years now -- was led by home loans, which grew in double-digits so far this fiscal. While asset quality improved, with gross non-performing assets (GNPA) and net NPA (NNPA) ratios declining to 6.9 and 2.3 per cent, respectively, in September 2021, the slippage ratio inched up during the same period as private sector banks showed a higher rate of deterioration in asset quality, as per the report. But, based on the stress tests, the report warns that the GNPA ratio may rise to 8.1 per cent by September 2022 under the baseline scenario and further to 9.5 per cent under severe stress, if the economy is hit by an Omicron wave. Within the bank groups, public sector banks' GNPA stood at 8.8 per cent in September 2021 and may deteriorate to 10.5 per cent by September 2022 under the baseline scenario, while for private-sector lenders, the same may rise from 4.6 per cent to 5.2 per cent, and for foreign banks, it may increase from 3.2 per cent to 3.9 per cent over the same period, the report said. Similarly, the overall provisioning coverage ratio moved up from 67.6 per cent in March 2021 to 68.1 per cent in September 2021.

Comfortable CAR

Banks have not only improved their profitability, asset quality and capital adequacy, but will also be able to comply with minimum capital requirements even in a severe stress scenario, as per the macro-stress tests. However, the same tests on non-banks indicate that a significant number of them would be hit if there are liquidity shocks and the network analysis points to increasing inter-bank exposure, raising contagion risks. In sectoral terms, the GNPA ratio for personal loans rose above its level six months ago and a year ago, said the report without offering an exact number. The deterioration was led by housing and auto loans. The GNPA ratio for the industrial sector continues to decline, though some sub-sectors like food processing, chemical and infrastructure, excluding electricity, saw increases over their March 2021 levels. Restructuring under the resolution framework 2.0 stood at 1.5 per cent of total advances in September 2021, which covered 81.7 per cent of the borrower accounts where restructuring under the scheme was invoked. In the case of MSME and retail loans, the restructuring was to the extent of 2.4 per cent of total sectoral advances and covered 80 per cent of borrower accounts where it was invoked, the report said, adding that a clearer picture of the aggregate extent of restructuring will emerge after the moratorium ends on December 31, 2021.

The share of large borrowers in GNPAs fell from 75.9 per cent in March 2020 to 62.1 per cent in September 2021, and their loans in the special mention account (SMA6) buckets also declined, and the share of top 100 borrowers shrunk marginally to 16.6 per cent while their share in GNPA pool fell to 5.7 per cent.

The common equity tier-I (CET 1) capital ratio may reach 12.5 per cent by September 2022 under the baseline scenario and decline to 11.9 per cent and 11.2 per cent under the medium and severe stress scenario, respectively, but even under adverse scenarios, no bank would face a decline of the CET 1 capital ratio below the regulatory minimum of 5.5 per cent. In case of a severe shock, the GNPA ratio of banks may move up from 6.9 per cent to 12.7 per cent, and the system-level CRAR declines from 16.3 per cent to 12.8 per cent, and the system-level capital impairment stands at 23.3 per cent. Further, eight banks with a share of 20.2 per cent in total assets may fail to maintain the regulatory minimum level of CRAR, and their CRAR would fall below 7 per cent in case of these banks, and six of them would record a decline of over 8 percentage points.

The CRAR of urban co-operative banks stood at 12.9 per cent in September 2021, while that of NBFCs was at 26.3 per cent. Network analysis indicated that the total outstanding bilateral exposures among constituents of the financial system have been on an upswing since H1FY21, with banks having the largest share of bilateral exposures albeit still below pre-pandemic levels. In terms of inter-sectoral exposures, mutual funds, followed by insurers, remained the dominant fund providers, while NBFCs were the biggest receivers of funds, followed by housing finance companies. The RBI checks the resilience of banks' balance sheets to unforeseen shocks emanating from the macroeconomic environment using macro-stress tests through which impairment and capital ratios are projected over a one-year horizon under a baseline and two adverse (medium and severe) scenarios.

A stronger and sustainable recovery hinges on the revival of private investment and shoring up private consumption, which unfortunately still remain below their pre-pandemic levels

-Shaktikanta Das, RBI Governor