RBI STRESS TEST – SLOWLY BUT SURELY GETTING OUT OF THE WOODS

Today morning, the gainers list on the BSE was dominated by banking stocks, mainly the PSU banking stocks.

The BSE PSU index is up, lit a bright green because it is banking stocks which have pushed this entire index into the positive, with Corp Bank, Union Bank, Central Bank, United Bank, IOB, Bank of India and et al leading.

The reason? The Stress Test or the RBI Financial Stability Report released yesterday concluded that the asset quality in the banking sector may improve in 2020.

And though this might be a boring report for many to peruse, a quick glance at the highlights is necessary information to be armed with to help make better stock market decisions.

The report says:

Bulk of the legacy non-performing assets (NPAs) already recognised in the banking books, the non-performing asset (NPA) cycle seems to have turned around.

Provision coverage ratio (PCR) of all SCBs rose sharply to 60.6 per cent in March 2019 from 52.4 per cent in September 2018 and 48.3 per cent in March 2018, increasing the resilience of the banking sector.

Gross Non performing assets (GNPA) of scheduled commercial banks (SCBs) may decline from 9.3 per cent in March 2019 to 9.0 per cent in March 2020.

PVBs’ (private banks) GNPA ratios may decline from 3.7 per cent to 3.2 per cent and that of FBs (foreign banks) may come down from 3.0 per cent to 2.9 per cent by March 2020.

Stress tests on banks’ credit concentration, considering top individual borrowers according to their stressed advances, showed that in the extreme scenario of the top 3 individual borrowers failing to repay22, the impact would be significant for 8 SCBs. These banks account for 14.6 per cent of the total assets of SCBs.

Stress tests on group borrowers reveal that as many as eight banks will not be able to maintain their CAR level at 9 per cent, if top three group borrowers fail to meet their payment commitments.

In an assumed baseline macro scenario, system-level capital adequacy ratio (CAR) is projected to come down to 12.9 per cent in March 2020, from 14 per cent in March 2019. 

There are 9,659 non-banking financial companies (NBFCs) registered with the Reserve Bank as on March 31, 2019, of which 88 were deposit accepting (NBFCs-D) and 263 systemically important non-deposit accepting NBFCs.

NBFCs were the largest net borrowers of funds from the financial system with gross payables of around Rs.8,446 billion and gross receivables of around Rs.723 billion as on end-March 2019.

HFCs were the second largest borrowers of funds from the financial system with gross payables of around ?5,884 billion and gross receivables of only ?430 billion as on end-March 2019.

For a more detailed and long read: https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=47426