RBI flags rise of bad loans with banks, stress in MSMEs

Mumbai: The prevailed crisis situation in the economy caused by the pandemic will likely increase the bad loans with banks up to 11.22 per cent in the extreme scenario by March 2022, the RBI warned in its Financial Stability Report.

The current level of the gross non-performing asset of 7.48 per cent in March 2021 has been found in the macro stress tests to be rising to 9.80 per cent under the baseline scenario and 11.22 per cent under severe stress scenarios by March 2022. But the report ruled out any shortcomings provided with sufficient capital both at the aggregate and individual level even amid crisis.

The expected increase of .54 per cent in March 2021 and edge up to 12.52 per cent by March 2022 under the baseline scenario of the NPAs of the public sector banks is seen as an improvement against the previous estimation aided by the pandemic proofing by regulatory support, it said.

The estimated increase of NPAs for private banks and foreign banks from baseline to severe stress is from 5.82 per cent to 6.04 per cent to 6.46 per cent, and from 4.90 per cent to 5.35 per cent to 5.97 per cent, respectively.

While banks' exposures to better rated large borrowers are declining, there are incipient signs of stress in the micro, small and medium enterprises (MSMEs) and retail segments, the FSR warned.

The report also indicated the incipient signs of stress in the micro, small and medium enterprises (MSMEs) and retail sectors due to the fall of demand for credit by large borrowers.

According to the FSR report, despite the depression in the economic activity caused by the second COVID wave in the country, the regulatory and fiscal policy measures helped to reduce the solvency risk of financial entities, stabilise markets, and maintain financial stability.

Going forward, as banks respond to credit demand in a recovering economy, they will need to reinforce their capital and liquidity positions to fortify themselves against potential balance sheet stress, the RBI FSR said.

The banks should increase their capital and liquidity positions in order to meet the credit demand in the recovering economy to strengthen themselves against potential balance sheet stress, the RBI report said.