Here are the key takeaways from the RBI FSR.
10-key takeaways from the RBI Financial Stability Report (FSR)
Here are key points made in the RBI FSR with larger implications for macro data, capital flows and the banking system.
- The RBI has warned that the sharp spike in commodity prices globally could result in a spike in inflation, as is already evident. However, the bigger concern expressed by the RBI is that this could result in vulnerable emerging market economies losing some of the welfare gains of the stimulus programs.
- The RBI noted that for the second half of FY21, the ferocity of COVID 2.0 dented economic activity. On the one hand, the government has had to spend more on healthcare and other welfare measures. However, lower output meant that collections of direct taxes, corporate taxes and GST were substantially weaker.
- There was a sharp spike in public debt with government running aggressive borrowing programs of over Rs12 trillion for two fiscal years in succession. Banks subscribed to most of the government paper, which would be tough once credit growth picks up.
- The FSR noted that India faces a unique situation where CASA deposits were growing strongly but loan growth remained tepid. This led to a weakening of the credit/deposit ratio. For Mar-21 HY, deposit growth of all SCBs was 11.9% while loan growth was just 5.4%. There is a case of lot of liquidity and not enough lending opportunities for banks.
- According to the RBI FSR, Indian banks showed a good traction on capital buffer creation as well as a progressive increase in the return on assets (ROA) and the return on equity (ROE). For example, between Sep-19 and Mar-20, the ROE of all scheduled commercial banks (SCB) improved from 4% to 7.7%. During the same period, the ROA improved from 0.4% to 0.7% for SCBs as a whole. What is more, the CRAR or the Capital adequacy ratio has improved consistently by over 130 bps in FY21 to 16%.
- There have been concerns expressed by the RBI in its outlook for gross NPAs for FY22. For example, the RBI FSR expects gross NPAs of SCBs to go up from 7.48% in Mar-21 to 9.80% by Mar-22. However, this is just a baseline assessment. In a worst-case scenario, RBI expects gross NPAs as of Mar-22 to deteriorate to 11.22%. RBI admitted to deterioration in the special mention accounts (SMA). However, stress tests indicate that Indian banks are sufficient capitalized to meet any gross NPA eventuality. The good news also came on the provisioning coverage ratio (PCR) with banks reporting increase in PCR from 66.2% in Mar-20 to 68.9% in Mar-21.
- The category-wise break up of gross NPAs could be a lot more interesting. For example, the RBI FSR expects the gross NPAs of PSU banks to increase from 9.54% in Mar-21 to 12.52% in Mar-22 in a baseline scenario and 13.95% in a worst-case scenario. In the private sector banks, gross NPAs could spurt from 4.78% in Mar-21 to 5.82% by Mar-22 in a baseline scenario and to 6.46% in a stressed worst-case scenario.
- RBI FSR has also assured that the restructured advances as of Mar-21 were just about 0.9% of the total advances. This was the one-time restructuring scheme that ended in Sep-20. Even in these restructured advances, the bulk of the restructuring at 1.7% was in the case of MSMEs, where stress was highest. In case of corporates, the restructured advances were at the mean of 0.9% while for retail advances, it was much lower at 0.7%.
- The FSR underlined that the focus on lowering rates and better transmission helped lower the cost of funds and borrowing rates. For example, the cost of funds of SCBs fell from 5.6% in Sep-19 to 4.7% in Mar-21, although further downsides may be limited. PSBs had lower cost of funds at 4.6% compared to 5% for private banks. However, the yield on assets has also come down for SCBs from 8.3% in Sep-19 to 7.6% in Mar-21. As a result, net interest margins (NIM) is marginally up from 3.1% to 3.3% in last 18 months.
- On a sectoral basis, industrial borrowers had a higher gross NPA ratio of 11.3% compared to 9.8% for agricultural borrowers. Retail stress at 2.1% is still quite low. In terms of borrowing sectors, construction, jewellery and engineering goods contributed the most to banking NPA stress. Chemicals had the lowest contribution to banking NPAs.