India's pile of bad loans could be at least 1.5 times bigger in the next 9 months

• The Reserve Bank of India (RBI) estimates that a fresh bad loan cycle may be on the horizon once the moratorium lifts.
• India’s central bank cautions that the pile of bad loans could increase from 8.5% in March 2020 to 12.5% in March 2021 — or even go as high as 14.7%.
• The capital adequacy ratio is also likely to take a hit. In the worst-case scenario, up to five banks could fail to meet their minimum capital level requirements.

Indian banks thought they were finally in the clear with the share of bad loans declining every quarter until the coronavirus pandemic brought businesses to a standstill. Now the Reserve Bank of India’s (RBI) stress tests indicate that the pile of bad loans could get 1.5 times bigger over the next nine months.


The moratorium on paying back loans, which was brought into effect in March, has kept a cloak on the true impact of the coronavirus pandemic. It allows the borrower to defer their interest payments, without being downgraded, until the moratorium comes to an end on August 31.


Stress tests done by the RBI based on macroeconomic factors indicate that the gross non-performing assets (GNPA) ratio may increase from 8.5% in March 2020 to nearly 12.5% in March 2021. Under very severe stress, it may even go as high as 14.7%.

Where are the bad loans coming from?
The impact on public sector banks will be greater with an increase of 3.9% in the baseline scenario with private sector banks seeing their GNPA ratio rise by 3.1%. “Given the fact that the impact of the moratorium is still uncertain and evolving, the exact nature of how the same will play out on the quality of banking assets is difficult to ascertain accurately,” the RBI said in its report.

For public sector banks, loans given out for real estate activities and electricity face the highest risk with under 3% being classified as good quality loans. Manufacturing, construction and telecom services could be the bane for private banks.

Financial stability to drop further
The capital to risk-weighted assets ratio (CRAR) has already edged from 15% in September 2019 to 14.8% in March 2020. Going forward, the RBI estimates that by March 2021 that CRAR level would have dropped to 13.3% — with the potential to go low as 11.8%.

The CRAR, also known as the capital adequacy ratio, is significant because it measures the amount of capital the bank has against the amount of risk that it’s exposed to.

Banks, both private and public, have been shoring up capital, raising more funds and, consequently, increasing their provisions to bear for the uncertainties in the market. Under the very severe stress scenario, the tests show that the top five banks in India may fail to meet the minimum capital level requirements by March 2021.

“This, however, does not take into account mergers or any further capitalisation, which will further increase system resilience,” said RBI’s report.

SEE ALSO:
IndusInd Bank's share price jumps over 2% after US investor plans to double its stake

Just like SBI, ICICI Bank has created a cash cushion in case bad loans rise

Axis Bank finalises Max Life Insurance investment and is closer to raising more funds