Given uncertainty induced by Covid-19 and its real economic impact, asset quality set to worsen sharply: RBI

Reserve Bank of India (RBI) on Tuesday cautioned the modest bad loan ratio of 7.5% at end-September 2020 end “veils the strong undercurrent of slippage” warning of a sharp decline in asset quality. The central bank pointed out the financial performance of the banking sector in H1FY21 had been shored up by the moratorium and the standstill in asset classification. “Going forward, although the risks to the banking sector remain tilted upwards, much hinges around the pace and spread of the economic recovery that is gradually gaining traction in H2: 2020:21,” RBI noted.

The accretion to NPAs, as per the RBI’s income recognition and asset classification (IRAC) norms, would have been higher in the absence of the asset quality standstill provided as a Covid-19 relief measure. “Given the uncertainty induced by Covid-19 and its real economic impact, the asset quality of the banking system may deteriorate sharply, going forward,” it said.

The moderation in the gross non performing asset (GNPA) ratio, which started after the peak in March 2018, continued through FY20 and FY21 so far, to reach 7.5% by end-September 2020. The improvement was driven by lower slippages which declined to 0.74% in September 2020 and resolution of a few large accounts through the Insolvency and Bankruptcy Code (IBC).

Fresh slippages remained the highest among PSBs.

Going forward, with gradual rollback of policy measures, deterioration in asset quality may pose challenges, although build-up of buffers like Covid-19 provisions and capital raising from market may help alleviate the stress, the central bank observed.

After a gap of two consecutive years, the loan growth at SCBs decelerated in 2019-20, reflecting both risk aversion and tepid demand. During the current financial year so far, this was accentuated by the Covid-19 pandemic.