Bad debt ratio for Indian banks may rise to 12.5%, RBI cautions in financial stability report
The Reserve Bank of India (RBI) on Friday said that certain actions undertaken by financial sector regulators and the Centre to lessen the impact of the Covid-19 pandemic has managed to ease operational constraints and helped in maintaining market integrity and resilience in the face of severe risk aversion. Simultaneously, the central bank also warned of bad debts for Indian lenders rising steeply to 12.5% of outstanding loans by March next year.
The apex bank in the 21st issue of its Financial Stability Report indicated that a combination of fiscal, monetary and regulatory interventions on an unprecedented scale with the help of the government had ensured normal functioning of the country’s financial markets despite a grim economic outlook earlier this year.
“In the evolving milieu, while risk management has to be prudent, extreme risk aversion would have adverse outcomes for all,” RBI Governor Shaktikanta Das said in his foreword to the bi-annual Financial Stability Report (FSR) released on Friday. The top priority right now for all banks and financial firms should be to hike capital levels and improve resilience, the RBI governor said.
“The over-leveraged non-financial sector, simmering global geopolitical tensions and economic losses on account of the Covid-19 pandemic are major downside risks to global economic prospects,” the Reserve Bank of India report stated.
Amid Indian lenders ranging from ICICI Bank to the beleaguered Yes Bank announcing plans to raise funds by selling shares to boost capital, the apex bank said, bad loans at Indian banks are expected to increase to 12.5% of outstanding credit by March 2021. The RBI cited prolonged nationwide lockdown, which had hurt trade and left thousands of people jobless in the country as potential causes for bad debt set to rise in Indian banks.
The country’s bad loan ratio was already one of the highest among major global economies at 8.5% at the end of March 2020. If the macro-economic environment takes a turn for the worse later this year, the ratio may escalate to 14.7% under the severely stressed economic scenario, the RBI said in its report.
At present, a moratorium provided on loan repayments for businesses and individuals is providing some relief for struggling businesses, but lenders may find a wave of loans turning into bad debt after that relief ends in August, the RBI cautioned.