15 March 2018 06:40:33 IST

Banks face significant stress, but stable overall: RBI

Despite the hardship, demonetisation will impart far-reaching changes, says Urjit Patel

The stress on the banking sector, particularly the public sector banks, remains significant, and banks may continue to be risk-averse in the near future as they focus on cleaning up their balance sheets, the Reserve Bank of India cautioned on Thursday.

In its latest Financial Stability Report, the central bank said scheduled commercial banks’ (SCBs) capital positions may remain insufficient to support credit growth.

Overall, the report said India’s financial system remains stable although banks, particularly PSBs, continue to face significant levels of stress.

Rising GNPA ratio

The RBI’s observations come in the backdrop of the SCBs’ gross non-performing advances (GNPA) ratio rising to 9.1 per cent in September from 7.8 per cent in March, pushing the overall stressed advances ratio to 12.3 per cent from 11.5 per cent, even as credit growth declined to a historical low of 5.8 per cent as on December 9.

RBI Governor Urjit Patel said: “While the domestic banking sector continues to face significant levels of stress partly reflecting legacy issues, on balance, enhanced transparency has helped to reinforce the stability of India’s financial system.”

The stress test conducted by the RBI shows that under the baseline scenario, the GNPA ratio may increase from 9.1 per cent in September to 9.8 per cent by March 2017 and further to 10.1 per cent by March 2018. The banking stability indicator shows that the risks to the banking sector remained elevated due to continuous deterioration in asset quality, low profitability and liquidity.

“If the macroeconomic conditions deteriorate, the GNPA ratio may increase further under such consequential stress scenarios. However, the system-level capital to risk-weighted assets ratio (CRAR) may remain above the required regulatory minimum,” the report said.

CRAR is the bank’s capital expressed as a percentage of its risk-weighted loan exposures.

The report noted that among the bank groups, public sector banks (PSBs) may continue to register the highest GNPA ratio.

Under the baseline scenario, the PSBs’ GNPA ratio may increase from 11.8 per cent in September to 12.5 per cent in March 2017 and 12.9 per cent in March 2018 — or even worse under a ‘severe stress’ scenario. PSBs may continue to record the lowest CRAR.

In a systemic risk survey, a majority of the respondents felt that demand for credit may increase marginally or remain unchanged over the next three months. A majority also indicated that the quality of credit would remain unchanged.


Patel felt that the demonetisation will impart far-reaching changes. “It is expected to significantly transform the domestic economy... in terms of greater intermediation, efficiency gains, accountability and transparency through increasing adoption of digital modes of payments, notwithstanding the short-term disruptions... and public hardship,” he said.

Remittances slowdown

The report said India’s external sector reflects significant improvement: the current account deficit contracted, but weakening remittance inflows may be a concern.