Banks in better position to manage stress in second Covid-19 wave: RBI

But lenders need to prepare for higher provisioning, monitor asset quality, says RBI

Banks are better placed in this Covid wave to manage stress in balance sheets than before, the RBI said, helped by higher capital buffers, improvement in recoveries and a return to profitability.
 
As the country battles a second wave of infections, state governments have imposed localised lockdowns to contain the spread. These curbs have hit economic activity, leading to job and business loss and increased stress in the system.
 
In its annual report released on Thursday, the Reserve Bank of India (RBI) said banks’ asset quality will need to be closely monitored in the coming quarters, with preparedness for higher provisioning against the backdrop of the Supreme Court lifting an interim stay on asset classification.
 
The waiving of ‘interest on interest’ charged on loans during the moratorium period (March 1, 2020, to August 31, 2020) may also impinge on lending institutions’ finances.
 
Stress tests indicate that banks have sufficient capital at the aggregate level even in a severe-stress scenario. Bank-wise as well as system-wide, supervisory stress testing provide clues for a forward-looking identification of vulnerable areas, the RBI added.
 
According to RBI data, the capital adequacy ratio (CAR) of banks rose to 15.9 per cent in December 2020 from 14.8 per cent in March 2020, on capital raising from the market, and retention of profits.
 
The gross non-performing assets (GNPA) ratio of banks decreased to 6.8 per cent in December 2020 from 8.2 per cent in March 2020. Prudent provisioning even over and above regulatory norms for accounts availing moratorium and undergoing restructuring, improved the provision coverage ratio to 75.5 per cent in December 2020 from 66.6 per cent in March 2020.

 
The proposed bad bank, the regulatory measures aimed at developing market-based mechanisms for credit risk transfer, such as securitisation, transfer of loan exposures and development of secondary loan market may help in reducing the stressed assets on the bank balance sheets.
 
The health of the banking sector emerged as a priority for the RBI as it sought to cushion the system from the pandemic (first wave). A number of measures were put in place to mitigate its impact. Some of them were easier access to working capital, moratorium, asset classification standstill, restriction on dividend pay-outs, permitting restructuring of viable accounts, it added.
 
Meanwhile, CARE Ratings said banks raised a significant amount of capital in FY21 to increase the loss absorption capacity in case of a rise in credit losses.
 
The non-performing assets of scheduled commercial banks are expected to decline 7.3 per cent in FY21, from 8.5 per cent in FY20 due to restructuring, write-offs and resilience in the economy. Several regulatory and government support schemes also helped borrowers to access liquidity and conserve cash flows, CARE said.