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The COVID pandemic has caused stress to the Banks and Non-Banking Finance Companies (NBFCs) since its onset. Due to job losses, pay cuts, and reduced revenue streams, many individuals and small businesses were not able to meet their loan obligations resulting in increased NPAs. According to the Reserve Bank of India’s (RBI) Financial Stability Report (FSR), bad debts in the Indian Banking system are expected to rise steeply by the end of the fiscal year. However, the report also mentions that this is not as worrisome as last year’s prediction and that banks are also better equipped with capital to handle the situation.

As per RBI’s macro stress test, the gross NPAs are expected to increase to 9.8% in March 2022 as compared to 7.48% in March 2021 under the “baseline” scenario and can reach 11.22% as per the “severe stress” scenario. A year ago it was anticipated that NPAs would reach 12.5% by the end of this fiscal year under the “baseline” scenario. However, the stress tests also revealed that Scheduled Commercial Banks (SCBs) have sufficient capital to deal with even the “severe stress” scenario, both at aggregate and individual levels.

Non Performing Assets (NPAs) Expected to Rise but Banks Are Equipped to Handle: RBI Report

Source: RBI PSB- Public Sector Banks, PVBs- Private Sector Banks, FBs- Foreign Banks, SCBs- Scheduled Commercial Banks

As per the FSR in July 2020, NPAs under the “severe stress” scenario was 14.8%. The primary reason for improvement this year is “pandemic proofing by regulatory support” as per the July 2021 FSR. Furthermore, the system-level capital adequacy ratio would moderate by 0.3% between March 2021 and March 2022 under the “baseline” scenario and by 1.3% and 2.56% under the “medium” and “severe” stress scenarios respectively.

The banking system’s capital to risk-weighted assets ratio (CRAR) improved 1.3% year on year to 16.03% in March 2021. The regulatory requirement for CRAR is 9%, which indicates that capital levels in the banking system are adequate and well above the requirements. However, medium and small enterprises (MSMEs) loans and retail loans still pose a high risk to the banking industry due to the fact that chances of slippage are higher. The FSR report of July 2021 warned that strict monitoring of asset quality of MSMEs and retail portfolios of banks must be carried out in the coming times.