Capital crunch

Structural problems in banking system would affect recovery

The latest Financial Stability Report of the Reserve Bank of India (RBI) underscores the kind of damage the ongoing pandemic can cause to the Indian banking system. Overall gross non-performing assets (GNPAs) for the scheduled commercial banks declined from 9.3 per cent in September 2019 to 8.5 per cent in March 2020, but things could worsen significantly in the coming quarters. The stress tests conducted by the RBI showed that GNPAs could go up to 12.5 per cent by March 2021 under the baseline scenario, compared with 8.5 per cent in March 2020. However, if the macroeconomic outlook worsens further, which is a real possibility, the GNPA ratio could go up to 14.7 per cent under a very severe stress scenario. The central bank has assumed gross domestic product contraction of 8.9 per cent under the very severe stress scenario, which cannot be ruled out. While other assumptions such as those related to inflation and current account are unlikely to materialise, the scale of contraction in the economy is perhaps the biggest risk for the banking system. The re-imposition of lockdown in various parts of the country and continued increase in Covid-19 cases could worsen the macroeconomic outlook.

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