RBI Annual Report: Asset quality of banks needs to be closely monitored, warns RBI

Finance Minister Nirmala Sitharaman had recently said "interests of workers of banks which are likely to be privatised will absolutely be protected whether their salaries or scale or pension all will be taken care of".

The Reserve Bank of India (RBI) on Thursday said that asset quality of the banks would need close monitoring along with their preparedness for higher provisioning in coming quarters.

In its semi-annual financial stability report, RBI had earlier said that the bad loan ratio of banks could rise to 13.5% under the baseline stress scenario by September 2021. The regulator has cautioned banks as lenders will have to show true picture of bad loans after Supreme Court lifted interim stay on classifying non-performing assets (NPA) in March 2021. RBI also said that the waiver of compound interest on all loan accounts which opted for moratorium during March-August 2020 may also put stress on banks’ financial health.

Last year, RBI had announced a six-month moratorium for all term loan borrowers in the wake of Covid impact on borrowers. The Supreme Court had directed lenders to waive compound interest of the borrowers during the moratorium period. The regulator is of the view that banks are better positioned than before in managing stress in their balance sheets thanks to higher capital buffers, improvement in recoveries and a return to profitability. “Stress tests indicate that Indian banks have sufficient capital at the aggregate level even in a severe stress scenario. Bank-wise as well as system-wide supervisory stress testing provide clues for a forward-looking identification of vulnerable areas,” RBI said in its annual report 2020-21 released on Thursday.

The report, however, highlighted that gross NPA ratio of banks decreased to 6.8% by December 2020 from 8.2% in March 2020. Prudent provisioning by banks, even over and above regulatory prescriptions for accounts availing moratorium and undergoing restructuring, resulted in an improvement in the provision coverage ratio (PCR) of banks. Provision coverage ratio has improved to 75.5% at December-end 2020 from 66.6% in March 2020. Adjusting for write offs, the PCR was 88%, up from 81.3% in March 2020.

The capital to risk-weighted assets ratio (CRAR) of banks rose to 15.9% by end-December 2020 from 14.8% at end-March 2020. The capital adequacy ratio of banks was aided by capital raising from the market by public and private sector banks, and retention of profits.

The report also said that gross NPA ratio for non-banking financial institutions (NBFCs) improved to 5.7% in December 2020 from 6.8% in March 2020. Similarly, the capital adequacy ratio of NBFCs marginally improved to 24.8% in December 2020 from 23.7% during the same period last year.