The RBI Financial Stability Report (FSR) was delayed this time leading to speculation that there may be some real disconcerting data points in the report. However, a quick reading of data reveals that while there are concerns in the FSR about the trajectory of NPAs in the banking system, most of the other banking data parameters are fairly encouraging.
Theme of the RBI FSR for Jan-21
The RBI FSR has dwelt at length on the COVID pandemic and its likely impact on the health of the banking system. The RBI has pointed out that due to the surfeit of liquidity in the system, banks continued to do well even in the midst of stress. However, the RBI FSR also expresses apprehension that many of the problems in terms of asset quality and delinquencies may unfold gradually in the coming months.
The RBI FSR has specifically pointed out that in the case of weaker and more vulnerable banks, some of the pre-pandemic problems might get accentuated. The RBI FSR has dwelt at length on the likely impact of the pandemic on scheduled banks, NBFCs and even the larger cooperative banks with systemic implications.
Credit growth – PSU Banks put up a solid performance
It sounds ironical but at a time when most investors have been sceptical about PSU banks, they have actually outperformed private banks and foreign banks in terms of momentum of credit growth. For the Sep-20 HY, the credit growth of PSU banks picked up to 4.6% from just 3% in Mar-20. At the same time, private banks saw credit growth easing from 10.4% to 7.1%. The sharpest cut was in foreign banks where the positive credit growth of +7.2% transformed into -5.4% contractions. At an overall level, banking credit growth eased from 5.7% in Mar-20 to 5.0% in Sep-20 HY.
What really spurred this relatively good credit performance in a tough year was the 10.3% yoy growth in deposits of all scheduled commercial banks led by precautionary savings. PSU banks recorded 9.6% deposit growth; best in last 5 years.
PSU banks score on profitability parameters too
If you put all the scheduled commercial banks together, then the overall growth in net interest income (NII) was 16.2% in Sep-20 HY compared to 13% in Mar-20. The big casualty was other operating income like fee income, treasury income etc where the growth plummeted from 29.3% to just 1.2%.
The big story for banks in the Sep-20 HY was the sharp spike in liquidity which led to lower cost of funds widening of the net interest margins (NIMs). Even if you look at the two critical banking parameters of ROA and ROE, both ratios showed a sharp growth. This growth was led by PSU banks which turned around from sub-zero levels to positive targets.
How bad are the bad assets with banks?
That is the one parameter that most analysts and economists were awaiting the RBI FSR for. The report has laid out the bad assets situation and the likely trajectory in elaborate detail. Here are some punch lines in the RBI report on bad assets trajectory.
According to the RBI FSR, Gross NPAs as of Sep-20 stood at 7.5% for all banks while the net NPAs were at 2.1%. Slippages were also down across the board.
The provision coverage ratio of the entire banking sector improved from 66.2% in Mar-20 HY to 72.4% in Sep-20 HY, hinting at most bad assets provided for.
The capital risk adequacy ratio (CRAR) improved from 14.7% to 15.8%. The improvement was lowest for PSU banks at 60 bps while it was 170 bps for private banks and 100 bps for foreign banks.
The big shift has been in the share of large borrowers in the GNPAs falling sharply from 73.5% to just about 50.5%. This also has a counter-intuitive explanation that a lot of stress in the last one year has been pronounced in smaller businesses.
The biggest concern is the trajectory of GNPAs by Sep-21. The RBI FSR estimates that the GNPAs could spurt from 7.5% in Sep-20 to 13.5% by Sep-21. RBI has warned that in the event of extreme stress, GNPAs could even scale 14.8% by Sep-21.
PSU banks are likely to be the worst hit as per the RBI with GNPAs moving up from 9.7% to 16.2%. In the case of private banks the GNPAs are likely to increase from 2.5% to 4.6%. Foreign banks could see gross NPAs shoot up from 5.4% to 7.9% in Sep-21.
FSR report is all about likely impairment
The RBI FSR report estimates that a lot of asset quality problems may be hidden due to the moratorium and other lenient measures. All these may unfold to real form by Sep-21. As a result the capital adequacy may drop from 15.6% to a worst case scenario of 12.5%. That is something for the RBI and the Ministry of Finance to worry about.