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Banks' asset quality likely to deteriorate sharply: RBI report

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Banks' asset quality likely to deteriorate sharply: RBI report

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"Given the uncertainty induced by COVID-19 and its real economic impact, the asset quality of the banking system may deteriorate sharply, going forward,” the Reserve Bank warned in the Report on Trend and Progress of Banking in India 2019-20.

The Reserve Bank of India (RBI) has warned after cases of borrowers defaulting on their loans may rise sharply because of the impact that the COVID-19 pandemic has had on businesses.

"Given the uncertainty induced by COVID-19 and its real economic impact, the asset quality of the banking system may deteriorate sharply, going forward,” the Reserve Bank warned in the Report on Trend and Progress of Banking in India 2019-20, released today.
Gross non performing asset (NPAs) of commercial banks-- public, private, foreign and small finance--as a percentage of total loans stood at 7.5 percent as of as of September 2020, the second consecutive year of decline.
But the RBI has warned that this downtrend in NPAs may not sustain.
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"The modest GNPA ratio of 7.5 percent at end-September 2020 veils the strong undercurrent of slippage,” the RBI said in the report
The regulator said that the addition of NPAs would have been higher if banks had not offered a moratorium to its customers who were finding it hard to pay back their loans.
For instance, Union Bank of India’s GNPA ratio would have been higher by 0.66 percent, SBI’s by 0.60 percent, Bandhan Bank’s by 0.36 percent, and HDFC Bank’s by 0.29 percent, the report said.
While banks improved their capital buffers, asset quality, raised liquidity coverage ratios through 2019-20, RBI noted that leverage ratios of banks had declined.
"Despite the COVID-19 pandemic, these improvements in soundness indicators continued till September 2020 due to moratorium on loans till August 2020 and continuing asset classification standstill. However, an increase in the restructured advances ratio to 0.43 per cent at end-September 2020 from 0.36 in March 2020 may be indicative of incipient stress.”
The moderation in NPA ratios was driven by lower slippages, which declined to 0.74 per cent in September 2020, and also the resolution of a few large accounts through the Insolvency and Bankruptcy Code (IBC), the report said.
The report noted that the rapid credit growth during 2005-12, coupled with absence of strong credit appraisal and monitoring standards and wilful defaults, were responsible for sizeable asset impairments in subsequent years.
Large borrowal accounts (with exposure of Rs 5 crore and above) constituted 79.8 percent of NPAs and 53.7 per cent of total loans at end- September 2020, the report found. During 2019-20, PSBs’ GNPA ratio as well as the ratio of restructured standard assets to total funded amounts emanating from larger accounts trended downwards. On the contrary, private banks experienced an increasing share of NPAs in respect of such accounts.
The share of special mention accounts (SMA-0)- with over dues of upto 30 days- witnessed a sharp rise in September 2020. "This may be an initial sign of stress after lifting of moratorium on August 31, 2020. However, the share of other categories of SMAs i.e., SMA-1 and SMA-2 remained at a relatively lower level," RBI noted.
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