The Reserve Bank of India recently published the 20th issue of the Financial Stability Report (FSR). This installment of the FSR serves to represent the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC) with regard to risks to financial stability and the resilience of the financial system. The report also covers matters related to the progression and regulation of the financial sector.
Insights on Credit Growth
Bank credit refers to the total amount of funds that individuals or businesses can borrow from a bank. In September 2019, Scheduled Commercial Banks’ (SCBs) year-on-year credit growth remained low at 8.7%, a decrease from 13.2% in March 2019. However, Private Sector Banks (PVBs) recorded a double-digit credit growth of 16.5% in September 2019.
Predictions for Increase in Gross Non-Performing Asset Ratio
The Gross Non-Performing Asset (GNPA) ratio of banks is anticipated to rise to 9.9% by September 2020 from 9.3% in September 2019, according to the SCB. Additionally, Public Sector Banks’ (PSB) GNPA ratios may also inflate to 13.2% by September 2020, up from 12.7% in September 2019. Under a stress scenario, private banks’ ratio could increase to 4.2% from 3.9%, while Foreign banks’ (FB) GNPA ratio might increase to 3.1% from 2.9%.
| Bank Type | GNPA Sep 2019 | Expected GNPA Sep 2020 |
|---|---|---|
| SCB | 9.3% | 9.9% |
| PSB | 12.7% | 13.2% |
| Private Banks | 3.9% | 4.2% under stress scenario |
| Foreign Banks | 2.9% | 3.1% |
Understanding Non-Performing Assets
Non-Performing Assets (NPAs) are loans or advances that default or are overdue in scheduled payments of principal or interest. A debt is typically classified as a non-performing asset when loan payments haven’t been made for at least 90 days. Gross non-performing assets accumulate all loans defaulted by individuals or entities that borrowed from the financial institution, while Net non-performing assets are calculated after deducting provision amount from gross non-performing assets.
The Role of Capital to Risk-weighted Assets Ratio (CRAR)
CRAR signifies a bank’s available capital as a percentage of its risk-weighted credit exposures. Also known as the Capital Adequacy Ratio (CAR), it measures the bank’s financial strength. All banks’ CRAR improved to 15.1% in September 2019 from 14.3% in March 2019 as a result of the government’s recapitalisation of PSBs.
Improvement in Provision Coverage Ratio (PCR)
The Provision Coverage Ratio (PCR) of all SCBs increased to 61.5% in September 2019, up from 60.5% in March 2019, which indicates an enhanced resilience of the banking sector. PCR is the specified percentage of funds that banks must set aside to cover potential losses due to bad loans.
Challenges and Way Forward
The global economy faces a series of uncertainties such as delay in the Brexit deal, trade tensions, oil-market disruptions, and geopolitical risks, resulting in significant growth deceleration. The domestic economy also experienced a slackening in aggregate demand in the second quarter of 2019-20, continuing the growth deceleration trend. Reigniting consumption and investment, while maintaining vigilance about spillovers from global financial markets, is an essential challenge moving forward.