Rollback of policy support can impact health of banks: RBI

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The Reserve Bank of India has warned that as policy support is rolled back, the impact of the Covid-19 pandemic can make a dent in the health of banks and non-banks in 2020-21.

With the gradual rollback of policy measures, deterioration in asset quality may pose challenges, although the build-up of buffers like Covid-19 provisions and fund-raising from market may help alleviate the stress, the RBI said in the Report on Trend and Progress of Banking in India 2019-20.

The RBI observed that with the loan moratorium coming to an end, the deadline for restructuring proposals is fast approaching. And, with the possible lifting of the asset quality standstill, banks’ financials are likely to be impacted in terms of asset quality and future incomes.

Going forward, the housing finance sector may need to brace for large slippages of loan assets and higher provisioning, said the report.

The RBI underscored that the data on gross non-performing assets (GNPA) of banks are yet to reflect the stress, obscured as they are under the asset quality standstill with attendant financial stability implications. An unprecedented economic contraction has taken its toll on the financials of banks and non-banks and purveyed a generalised risk aversion that has reduced the efficacy of the financial intermediation function, it added.

“Although stretched asset valuations are in apparent disconnect with the real economy, life support in the form of adequate credit flows to some of the productive and Covid-stressed sectors has been deficient. Going forward, the restoration of the health of the banking and non-banking sectors depends on how quickly the animal spirits return, and on the revival of the real economy,” the RBI said.

Its analysis of published quarterly results of a sample of banks indicates that their GNPA ratios would have been higher, in the range of 0.10 per cent to 0.66 per cent, at end-September 2020. Scheduled commercial banks’ GNPA ratio declined from 9.1 per cent at end-March 2019 to 8.2 per cent at end-March 2020 and further to 7.5 per cent at end-September 2020.

Subdued profitability

The central bank assessed that going forward, the muted credit expansion, the persistence of a low interest rate environment and the impending asset stress on account of the pandemic suggest that the profitability of banks is likely to remain subdued.

Covid-19 provisioning and ploughing back of dividends would help shield banks’s balance-sheets from stress to a certain extent, it said.



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