Statsguru: In a year dominated by Covid-19, financial stability is intact

The Reserve Bank of India’s (RBI’s) latest Financial Stability Report shows that gross non-performing assets (GNPAs) of scheduled commercial banks stabilised at 7.5 per cent of gross advances at the end of March 2021, unchanged from the level six months ago. Public sector banks still remain worse off compared to private banks in India in terms of asset quality (chart 1).

But the RBI had estimated it to be at a much higher level. A Business Standard analysis highlights that RBI has been overestimating GNPA levels over the last few years (chart 3).

“The dent on balance sheets and performance of financial institutions in India has been much less than what was projected earlier, although a clearer picture will emerge as the effects of regulatory reliefs fully work their way through,” RBI Governor Shaktikanta Das said in the report.

The central bank now expects about 9.8 per cent of gross advances to be non-performing by March 2022, in the baseline scenario (chart 2). In the medium stress case, where real gross domestic product growth has been pegged at 6.5 per cent, it expects worsening of the GNPA ratio to 10.4 per cent. RBI’s severe stress scenario could take GNPAs to 11.2 per cent of advances.

To bear losses, banks need a cushion in the form of risk capital. The capital to risk-weighted assets ratio has been improving in recent quarters (chart 4), and it makes the banking system more resilient to shocks and its after-effects.

This was about financial stability and its risks on the supply side. On the demand side, large corporations are not borrowing much, courtesy muted aggregate demand. Banking exposure to smaller non-financial companies is, however, rising (chart 5).

Listed non-financial companies have de-leveraged themselves in recent months and paused their capital investment (chart 6). They are also upping their cash balances, as the threat of lockdowns and restrictions is not fully behind us.

StatsGuru is a weekly feature. Every Monday, Business Standard guides you through the numbers you need to know to make sense of the headlines