Financial Insights

Gross NPA’s may increase to 9.5% by September 2022 in worst-case scenario : RBI Financial Stability Report

The RBI released a Financial Stability report which reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) on risks to financial stability and the capacity of the financial system.

As per the report, the global economy has lost momentum in the second half of 2021 due to the new variant, Omicron, that emerged in early November. This variant, as the report stated, has caused supply disruptions, resulted in higher inflationary levels and caused changes in monetary policies throughout several advanced economies.

The report also stated that there were emerging signs of stress in the MSMEs and micro finance segments. This has called for close monitoring in these segments in the future.

Stress tests of credit risk indicated that gross NPAs of banks may increase from 6.9% in September 2021 to 8.1% in September 2022, 9.5% under a severe stress scenario. However, the report stated that banks would have sufficient capital levels under stress levels.

The report credited the progress in vaccination for the domestic recovery and traction where corporate sector has begun regaining its strength and bank credit growth is improving. “Balance sheets of banks remain strong and capital and liquidity buffers are being bolstered to mitigate future shocks,” RBI Governor Shaktikanta Das stated in the report. “While the pandemic induced bouts of volatility, spillovers and heightened uncertainty are challenging, the Indian financial system has stood up well and remains well prepared to meet the funding requirements of the economy,” he said.

On a positive note, Capital to risk-weighted assets ratio of Scheduled Commercial Banks rose to a new peak of 16.6% and their provisioning coverage ratio stood at 68.1% in September 2021.

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