The country's financial system "remains stable" despite recent setbacks and the NPA cycle has "turned around" with a sharp reduction in the ratio of dud assets to 9.3 percent, the Reserve Bank of India (RBI) said Thursday in the Financial Stability Report.

The non-performing assets have "turned around" with a sharp fall in the system-wide NPAs to 9.3 percent in March 2019 from 11.2 percent a year ago, the bi-yearly report said. The NPAs ratio is expected to narrow down further to 9 percent in March 2020 as per the baseline scenario, it said.

The share of the state-run banks in the overall NPAs was at an elevated 12.6 percent, but is likely to come down to 12 percent by March 2020. "The country's financial system remains stable despite some dislocation of late," the report said, probably alluding to the troubles being faced by the non-banking lenders.

However, the financial market risks continue to be perceived as a "high-risk category" affecting the system, while global risks and risk perception on macroeconomic conditions as also institutional risks are perceived medium, it said.

2019 Financial Stability Report

India’s financial system remains stable in the backdrop of improving the resilience of the banking sector.

Emerging trends in the global economic and geopolitical environment pose challenges.

Global economic activity continues to face significant headwinds.

Adverse geopolitical developments, trade tensions taking a toll on biz, consumer confidence.

The domestic economy hit a soft patch recently as private consumption turned weak.

Reviving private investment demand remains a key challenge going forward.

Credit growth of banks picked up, with public sector banks (PSBs) registering near double-digit growth.

Capital adequacy of banks improved after the recapitalisation of PSBs.

The bulk of legacy NPAs already recognised in the banking books.

NPA cycle seems to have turned around.

Provision coverage ratio (PCR) of all banks rose sharply to 60.65 percent in March 2019 from 48.3 percent in March 2018.

Financial Institutions: Performance and Risks

Recent developments in the non-banking financial company (NBFC) sector brought the sector under greater market discipline.

The analysis shows Joint Solvency-Liquidity contagion losses to the banking system due to the failure of banks lower for March 2019 than in March 2018.

Joint Solvency-Liquidity contagion losses lower due to a better-capitalised PSB system.

Failure of the largest HFCs/NBFCs can cause solvency contagion losses. comparable to those caused by the big banks.

Need for greater surveillance over large HFCs/NBFCs.

Stress Test Results

Banks’ gross GNPA (Gross non-performing assets ) may decline from 9.3 percent in March 2019 to 9 percent by March 2020 under the baseline scenario.

Financial Sector: Regulation and Developments

June 7 NPA resolution circular builds in an incentive for early adoption of a resolution plan.

IBC showing steady progress in the resolution of stressed assets.

Credit Quality of Large Borrowers

Share of large borrowers in banks’ total loan portfolios at 53 percent in March 2019 against 54.75 percent in September 2018.

Share of large borrowers in banks’ GNPAs at 82.2 percent in March 2019 against 83.9 percent in September 2018.

The proportion of funded amount outstanding with any signs of stress came down from 25.3 percent in September 2018 to 20.9 percent in March 2019.

SMA-2 loans declined by 27 percent between September 2018 and March 2019.

Top 100 large borrowers accounted for 16.5 percent of banks’ gross advances and 18.6 percent of GNPAs.

Macro Stress Test (Credit Risk)

Baseline Scenario

All banks’ gross NPA ratio can fall from 9.3 percent in March 2019 to 9 percent by March 2020.

Public sector banks’ gross NPA ratio can fall from 12.6 percent in March 2019 to 12 percent by March 2020.

Private banks’ gross NPA ratio can fall from 3.7 percent in March 2019 to 3.2 percent by March 2020.

Foreign banks’ gross NPA ratio can fall from 3 percent in March 2019 to 2.9 percent by March 2020.

Medium Stress Scenario

All banks’ gross NPA ratio can fall from 9.3 percent in March 2019 to 9.2 percent by March 2020.

Public sector banks’ gross NPA ratio can fall from 12.6 percent in March 2019 to 12.1 percent by March 2020.

Private banks’ gross NPA ratio can rise from 3.7 percent in March 2019 to 3.8 percent by March 2020.

Foreign banks’ gross NPA ratio can rise from 3 percent in March 2019 to 3.5 percent by March 2020.

Severe Stress Scenario

All banks’ gross NPA ratio can rise from 9.3 percent in March 2019 to 9.6 percent by March 2020.

Public sector banks’ gross NPA ratio can fall from 12.6 percent in March 2019 to 12.2 percent by March 2020.

Private banks’ gross NPA ratio can rise from 3.7 percent in March 2019 to 4.4 percent by March 2020.

Foreign banks’ gross NPA ratio can rise from 3 percent in March 2019 to 4.1 percent by March 2020.

Macro Stress Test

5 banks may have CRAR (Capital to Risk Adjusted Assets Ratio) below minimum regulatory level of 9 percent by March 2020 under the baseline scenario.

7 banks may have CRAR below minimum regulatory level of 9 percent by March 2020 under a medium stress scenario.

9 banks may have CRAR below minimum regulatory level of 9 percent by March 2020 under a severe stress scenario.

(With inputs from PTI)

First Published:Jun 27, 2019 9:46 PM IST