Nifty PSU Bank index tumbles over 1%, RBI warns of fall in asset quality post moratorium

Bank stocks were in focus today falling as much as 1 per cent after the Reserve Bank of India (RBI) released a report on Trend and Progress of Banking in India in 2019-20. The report talked about the impact of COVID-19 on banking and non-banking sectors. Bank of Baroda, Indian Bank, Punjab National Bank, Canara Bank and UCO Bank were the top losers on PSU Bank index. An analyst at Geojit Financial Services said that the latest RBI report warns of the sharp deterioration in the asset quality of banks post-moratorium. “This is likely to impact banking stocks, particularly the PSU bank stocks which have been rallying recently,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

RBI undertook several measures to mitigate the effects of COVID-19 pandemic. Its regulatory ambit was reinforced by legislative amendments, giving it greater powers over co-operative banks, non-banking financial companies (NBFCs), and housing finance companies (HFCs). The gross non-performing assets (GNPA) ratio of scheduled commercial banks (SCBs) declined from 9.1 per cent in Mar’19 to 8.2 per cent in Mar’20 and 7.5 per cent in Sep’20.

Analysts at Motilal Oswal Financial Services remain watchful on the asset quality of banks as they recognize NPLs from the moratorium/overdue loans. The brokerage firm said that the overall trends have fared better than earlier expectations, aided by a sharp improvement in collection efficiency. “Though slippages are likely to increase over 2HFY21, particularly after the SC order ended the moratorium on 31 Aug’20, many banks have already provided for this and carry an additional provisions buffer, which should limit the impact on profitability, even as credit cost remains elevated,” it added.

Moreover, the capital to risk-weighted assets (CRAR) ratio of SCBs strengthened from 14.3 per cent at end-March 2019 to 14.7 per cent at end-March 2020 and 15.8 per cent in September 2020, aided by recapitalisation of public sector banks (PSBs) and capital raising from the market by both public and private sector banks. The central bank undertook several measures to mitigate the effects of the COVID-19 pandemic. Its regulatory ambit was reinforced by legislative amendments, giving it greater powers over co-operative banks, non-banking financial companies (NBFCs), and housing finance companies (HFCs).

The report also stated that the consolidated balance sheet of NBFCs decelerated in 2019-20 due to near stagnant growth in loans and advances, although some improvement was visible in the first half of the financial year 2020-21. “Notwithstanding a marginal deterioration in asset quality, the NBFC sector remains resilient with strong capital buffers,” it said.