Indian banks bad debt ratio could reach nearly 15% by March in worst case – report
MUMBAI (Reuters) – Bad debts in India’s banking system could reach nearly 15% of total loans by March 2021, with coronavirus crisis leading to increased levels of household and business debt, Financial said Stability and Development Council in a report released on Friday.
Indian banks have struggled for years against the rise in bad loans, but managed to reduce gross non-performing assets (APNs) to 8.5% in March, from 9.3% in September 2019, following tough new rules imposed by the central bank.
As India’s economy feels the impact of the COVID-19 pandemic, macro stress tests indicate that all banks’ gross NPA ratio could rise to 12.5% by next March in a baseline scenario and could climb to 14.7% in a very severely stressed scenario, the report says. He did not give details on this scenario.
“The pandemic has the potential to amplify financial vulnerabilities, including the burden of corporate and household debt in the event of a severe economic contraction,” the report said.
The semi-annual report is compiled by the Financial Stability and Development Council – a group of regulators – and published by the Reserve Bank of India.
FINANCIAL SECTOR RISKS
The report pointed out that the borrower relief measures introduced as part of measures to help India’s economy during the pandemic, such as deferral of loan and interest payments for six months, could have implications for the financial health of banks in the future.
“Almost half of the customers representing about half of the outstanding bank loans have chosen to benefit from the relief measures,” he said.
The report also highlighted the problems of more than 9,500 shadow banks, known as non-bank financial corporations (NBFCs), in India, which have struggled with a liquidity crisis over the past two years.
“The declining share of market funding for NBFCs is a concern as it has the potential to increase liquidity risk for NBFCs as well as for the financial system,” the report said.
However, the report indicates that the risks of contagion through financial networks have moderated due to higher capital buffers introduced in recent years and a contracting interbank market.
Reporting by Swati Bhat and Nupur Anand; Editing by Alex Richardson and Susan Fenton