The new RBI report indicates that the asset quality and capital position of the banking system continues to improve. It’s something to lean on

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Despite concerns, the asset quality of India’s banking system continued to improve. According to the latest Financial Stability Report from the Reserve Bank of India, Gross Non-Performing Loans (GNPA) of the banking system fell from 7.4% in March 2021 to a six-year low of 5.9% in March 2022 While public sector banks continue to be more stressed than private banks – for the former bad debts accounted for 7.6% of advances, while for the latter the figure is less than 3.7% – the improvement is generalized. At the same time, banks have also seen an improvement in their capital position, with the ratio of capital to risk-weighted assets rising to 16.7% at the end of March 2022. This is good news. It is also heartening that central bank stress tests indicate that banks are well capitalized and are “capable of absorbing macroeconomic shocks even in the absence of any further injections of capital from stakeholders.”

Data presented in the report shows that banks have seen an improvement in the quality of their assets across all major sectors. Bad debts have fallen even in sectors such as engineering goods, gemstones and jewelry, and construction – sectors where they have been significantly high in the past. And even as new slippages in the bad debt category have diminished, banks have increased their provisioning for bad debts. In addition, loan restructuring under the resolution framework accounted for only 1.6% of total advances in December 2021. The RBI report also shows that the share of large borrowers in banks’ loan book has decreased to less than 48%100 of total bank advances, indicating a “reduction in borrower concentration and diversification”. The bad debts of these large borrowers also decreased to 7.7% of advances at the end of March 2022. As a result, their share in the bad debts of all banks stood at 62.3% in the second half of 2021. -22, much lower. than levels seen in September 2020. However, the continued increase in the SMA-0 and SMA-1 categories (loans with principal or interest payments up to 30 days in arrears are referred to as SMA-0, while they are due between 31 to 60 days are SMA-1) requires close monitoring.

The central bank has also conducted stress tests to assess the strength of banks’ balance sheets in the face of macroeconomic shocks. In a baseline scenario, he estimates that banks’ NPLs could decline further to 5.3% by March 2023. If the macroeconomic environment deteriorates, NPLs could reach 6.2% in a stress scenario average, deteriorate to 8.3% in a medium stress scenario. severe stress scenario. However, even in a severely stressed macroeconomic environment, the RBI does not expect the capital position of any of the banks to fall below minimum regulatory requirements.

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