RBI wary of recast MSME portfolio; Banks’ gross NPAs at 6-year low

The gross non-performing assets (GNPA) ratio of banks has come down to a six-year low in March 2022, but the Reserve Bank of India (RBI) has cautioned that the Rs 46,186-crore MSME restructured portfolio has the potential to create stress.

The central bank, in its Financial Stability Report (FSR) released on Thursday, observed that bad assets in the MSME sector are relatively high, though they have moderated from 11.3% in September 2021 to 9.3% in March 2022. The restructuring of portfolios to the tune of Rs 46,186 crore constitutes 2.5% of the total advances under the May 2021 scheme.

The report notes that GNPAs of banks fell from 7.4% in March 2021 to 5.9% in March 2022. The net non-performing assets (NNPA) ratio dipped by 70 bps during 2021-22 and stood at 1.7 % at the year-end. Moreover, write-off ratios also declined for the second successive year to 20% in 2021-22.

It points out that the decline in risk-weighted assets continues, indicating that banks should remain cautious about the risk profile of borrowers in a dynamic environment characterised by considerable uncertainty.

Banks’ balance sheets are robust and capital buffers remain adequate, the central bank observed as reflected in the higher capital to risk weighted assets ratio (CRAR), which rose by 18 bps to 16.7% in March 2022. The CRAR of private and public sector banks remained above 18% as fundraises and retained earnings helped them augment their capital bases. As such, the banking stability indicator, which presents an overall assessment of changes in underlying conditions and risk factors that have a bearing on the stability of the banking sector, showed improvement in soundness, efficiency and market risk dimensions in H2FY22.

The RBI expects the gross NPA ratio to improve to 5.3% by March next year under its baseline scenario, driven by robust bank credit expansion. RBI governor Shaktikanta Das said banks are “well positioned to withstand even severe stress scenarios without falling below the minimum capital requirement”. He added the overall resilience of the financial institutions “should stand the economy in good stead as it strengthens its prospects”.

A stress test by the RBI showed state-run banks’ gross npa under the baseline scenario would fall to 7.1% in March next year, from 7.6% in March this year, while for private-sector lenders the share of bad loans may fall to 3% from 3.7% in the same period.

The report talks of a pick-up in credit growth which moved up to 11.5% in March 2022 and further to 12.9% as on June 3 with lending by both state-owned and private sector banks going up. Analysts have pointed out that the recovery in loan growth has been rather uneven, led by the metropolitan segment off a low base. Moreover, the growth is stronger in smaller-ticket loans. They also note that the demand on working capital is improving but still weak, much of it driven by the private banks.