The RBI in the Financial Stability Report 2020, released on July 24 has said that, non-performing assets (NPAs) of commercial banks is likely to escalate by March 2020, and if the economic situation worsens further banks are likely to come under severe stress.
Analysing commercial banks performance in 2019-20, the RBI report says that, slow moving improvements of commercial banks were overwhelmed and halted by the outbreak of COVID-19.
The report says that, commercial banks had reduced stressed assets in early 2019-20, and also arrested fresh slippages despite a prolonged slowdown in global and domestic growth. However towards the close of the financial year 2019-20, the improvements were halted by the outbreak of COVID-19.
According to the RBI, the moratorium on loan repayments and deferment of interest payments necessitated by the pandemic is likely to have adverse impact on the financial health of commercial banks going forward.
“Given the fact that impact of 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. Therefore, this will only be ascertainable with passage of time,” says RBI.
As per the report, credit growth of aggregate commercial banks which had considerably weakened during the first half of 2019-20, slid down further to 5.9 per cent by March 2020, and remained muted up to early June 2020. The moderation in credit growth was broad-based and across all bank groups.
The year-on-year deposit growth also moderated during the second half of 2019-20 and although a pick-up occurred in the early months of the year, the COVID-19 resulted in precautionary savings behavior.
The report further says that, by sector the quality of bank loans to services sector worsened in March 2020. The gross non-performing asset (GNPA) ratio of the retail loan sector also edged up. Among the major sub-sectors within industry, GNPA ratios swelled in construction and gems and jewellery sectors On the other hand, the infrastructure sector, basic metals, and electricity showed a perceptible decline in GNPA ratios as
on March 2020.
“Large borrowers accounted for 51.3 per cent and 78.3 per cent of the aggregate loan portfolio and GNPAs respectively of commercial banks in 2019-20. However both the shares have been declining since 2018 implying that, on an incremental basis, credit and NPA accretions are occurring in the small borrower category in recent years,” says
In terms of stability of the banking sector, the report says that, commercial banks recorded deterioration in soundness, liquidity and efficiency during the year 2019-20, as compared with the September 2019 position. “Loss of income of banks during COVID-19 will be visible only from the first quarter of 2020-21,” says the report.