On Monday, the RBI published the Financial Stability Report (FSR) and it was not very good.

It basically stated what we knew – for now all books of banks look better because of the various measures taken to combat the pandemic but once all that gets withdrawn, we will see a very stark image – grotesque and frightening. And that unfortunately is the reality of our banking system.

It is not as though the system was very robust and healthy; the sector was struggling and asset quality was a BIG issue even before corona hit us all; the only difference now is that instead of blaming it on fraud and poor management, it will all be blamed on the virus – the one and all solution for all inefficiencies.

The institutional risks rated this time are no different from what they were before corona – under ‘high’ risks were asset quality deterioration, additional capital requirements, level of credit growth and cyber risk. All other major risk groups, viz., global risks, macroeconomic risks and financial market risks were perceived as being ‘medium’ in magnitude. The only difference is that in the FSR of April/May, even those rated ‘medium’ were under ‘high.’ But notice the risks – they are almost timeless and never changing, pandemic or no pandemic.

And what also remains unchanged is that the private sector banks are more resilient while the PSU banks fumble and flounder. It’s like the Govt continues to play this game of ‘pretend’ like children do – fooling itself into thinking that it’s a super power and will save the banks, which will one day become powerful and save the country from all its woes. Well, that’s most certainly not going to happen, ever.

Given the way things are going, what could eventually happen after a few years in the future is that some PSU banks might further get consolidated into bigger banks, and for some banks there will be no takers as they might be too late for any kind of privatization. Eventually, we might get a banking sector that does actually supports the economy, where private sector will lead the race and PSU banks might be trimmed down to 2-3 large but better banks.

This is what the FSR is actually telling us – hope the Govt grows up and stops this playing with the banks.

A quick look into the highlights of the report:

• The stress tests indicate that the GNPA ratio of all Scheduled Commercial Banks (SCBs) may increase from 7.5 per cent in September 2020 to 13.5 per cent by September 2021 under the baseline scenario.
• If the macroeconomic environment worsens into a severe stress scenario, the ratio may escalate to 14.8 per cent.
• Among the bank groups, PSBs’ GNPA ratio of 9.7 per cent in September 2020 may increase to 16.2 per cent by September 2021 under the baseline scenario; the GNPA ratio of PVBs and FBs may increase from 4.6 per cent and 2.5 per cent to 7.9 per cent and 5.4 per cent, respectively, over the same period.
• In the severe stress scenario, the GNPA ratios of PSBs, PVBs and FBs may rise to 17.6 per cent, 8.8 per cent and 6.5 per cent, respectively, by September 2021.
• The stress test results indicate that four banks may fail to meet the minimum capital level by September 2021 under the baseline scenario, without factoring in any capital infusion by stakeholders.
• In the severe stress scenario, the number of banks failing to meet the minimum capital level may rise to nine.
• Going forward, mitigating actions such as phase-wise capital infusions or other strategic actions would become relevant for these banks from a micro-prudential perspective.
• With better appraisal of the pandemic’s impact on economic conditions, it is assessed that the worst is behind us, though the recovery path remains uncertain.