Declining tendency in GNPAs ratio is likely to continue

The Indian economy remains vulnerable to formidable global headwinds, which act as a drag on its recovery, cautioned the Financial Stability Report (FSR).

“The Indian economy is confronting strong global headwinds (extraordinary external shocks, especially prolonged geo-political hostilities).

“Yet, sound macroeconomic fundamentals and healthy financial and non-financial sector balance sheets are providing strength and resilience and engendering financial system stability.”

In his foreword to the report, RBI Governor Shaktikanta Das noted that the international economic order stands challenged; financial markets are in turmoil due to monetary tightening in most parts of the world; food and energy supplies and prices are under strain; debt distress is staring at many emerging markets and developing economies; and every economy is grappling with multiple challenges.

The Governor observed that amidst such global shocks and challenges, the Indian economy presents a picture of resilience. He emphasised that financial stability has been maintained.

“On the domestic front, we recognise the destabilising potential of global risks, even as we draw strength from the robust macroeconomic fundamentals of the Indian economy. The Reserve Bank and the other financial regulators remain vigilant and in readiness to ensure the stability and soundness of our financial system through appropriate interventions, whenever necessary, in the best interest of the Indian economy,” he said.

Stress tests

The FSR said the declining tendency in the gross non-performing assets (GNPAs) ratio is likely to continue — under the baseline scenario of the stress testing framework, it is projected to fall further to 4.9 per cent in September 2023 .

The GNPA ratio had declined to a seven-year low of 5 per cent in September 2022 — down from 5.7 per cent in June 2022 and 5.9 per cent in March 2022.

Stress test results reveal that Scheduled Commercial Banks (SCBs) are well-capitalised and capable of absorbing macroeconomic shocks even in the absence of any further capital infusion by stakeholders, the report said.

Under the baseline scenario, the aggregate CRAR (Capital to Risk-Weighted Assets Ratio) of 46 major banks is projected to slip from 15.8 per cent in September 2022 to 14.9 per cent by September 2023. 

Stress tests indicate that some non-banking financial companies (NBFCs) may be vulnerable to liquidity shocks. Pockets of stress are observed in select NBFC cohorts — NBFC-Investment and Credit Companies (GNPA ratio of 6.9 per cent) and NBFC-Factor (GNPA ratio of 6.8 per cent).

The FSR noted that in the financial sector, buoyant demand for bank credit and early signs of a revival in investment cycle are happening due to improved asset quality, a return to profitability and resilient capital and liquidity buffers.

These strengths are helping the financial system weather external spillovers, tightening global financial conditions and high volatility in financial markets.

Published on December 29, 2022