Bad news for banks! RBI says loan losses for lenders could rise in 2020

The performance of scheduled urban cooperative banks (SUCBs) deteriorated significantly between March and September 2019.

The Reserve Bank of India estimates the gross non-performing asset (GNPA) ratios of all scheduled banks could increase to 9.9% by September 2020 from 9.3% in September this year, following a set of macro stress tests. In the event of severe stress, GNPAs may rise to 10.5% by September 2020, the central bank wrote in the Financial Stability Report released on Friday. Also, the capital adequacy ratio for a clutch of 53 banks, the RBI estimated, could slip to levels of 14.1% a year down the line from 14.9% currently in a baseline scenario.

It noted while the banking system has shown signs of stabilisation, state-owned banks’ performance needs to improve and they need efforts to build buffers against disproportionate operational risk losses. The private sector banking space, the central bank observed, also needs to focus on aspects of corporate governance. The asset quality of agriculture and services sectors, as measured by their GNPA ratios, deteriorated in September 2019 compared to March 2019, the RBI highlighted.

The central bank wrote that NBFCs reported stress in asset quality during H1 2019-20 with the gross NPA ratio going up from 6.1% as at end-March to 6.3 % as at end-September. The net NPA ratio, however, remained steady at 3.4% during this time. As at end-September 2019, the capital adequacy of the NBFC sector stood at 19.5%, lower than 20% as at end-March 2019.

The performance of scheduled urban cooperative banks (SUCBs) deteriorated significantly between March and September 2019. At the system level, the capital adequacy ratio of SUCBs declined from 13.5% in March 2019 to 9.8% in September 2019. The GNPAs of SUCBs as a percentage of gross advances jumped from 6.4% to 10.5% while their provision coverage ratio declined from 61.1 % to 40.9%. Further, their RoA turned negative in September 2019 (-3.6%) from 0.7 % in March 2019, whereas their liquidity ratios marginally increased from 33.5% to 33.9 % during the same period.

The RBI projection of an increase in GNPAs comes at a time when industry was expecting reversal of the cycle. SBI chairman Rajnish Kumar on December 21 said most banks will be in a good position with respect to stressed assets by March and there is no dearth of liquidity in the system for lending. Kumar added that there are opportunities to lend in sectors such as infrastructure and consumer lending as there is not much of a decline in demand from consumers.

According to RBI’s projection, the GNPA ratios of state-owned lenders could increase to 13.2% by September 2020 from 12.7% in September 2019. The GNPAs of private banks may rise to 4.2% by September next year from to 3.9% in September 2019.