Indian banks, which are already struggling with one of the world’s worst loan ratios, are set to face more pain as the coronavirus pandemic slams growth, the central bank’s chief warned, urging lenders to gird up their defenses.
“The economic impact of the pandemic, due to the lockdown and the anticipated post-lockdown compression in economic growth, may result in higher non-performing assets and capital erosion of banks,” Reserve Bank of India (RBI) Governor Shaktikanta Das said at a banking event. “A recapitalisation plan for state-run and private banks has, therefore, become necessary.”
The bad loans ratio at Indian banks is set to deteriorate further as virus-related lockdowns shuttered businesses and left millions jobless, pushing the economy towards its first annual contraction in four decades. Bank loans may not grow at all in the year to March 31, according to the local unit of S&P Global Ratings, while McKinsey & Co. estimates the country’s bad loan ratio, will rise by a further 7 percentage points.
Banks’ gross non-performing loans ratio and the net ratio stood at 8.3% and 2.9% in March 2020, compared with 9.1% and 3.7% on March 2019, respectively, Das said.
“The medium-term outlook is uncertain and depends on the Covid-19 curve,” Das said. “Building buffers and raising capital will be crucial not only to ensure credit flow but also to build resilience in the financial system.”
To mitigate any stress, the RBI has advised all lenders and shadow banks to assess the impact of the virus on their balance sheet, asset quality, liquidity, profitability and capital adequacy for the financial year started April.
“Based on the outcome of such stress testing, banks and non-banking financial companies have been advised to work out possible mitigating measures including capital planning, capital raising, and contingency liquidity planning, among others,” he said. “The idea is to ensure continued credit supply to different sectors of the economy and maintain financial stability.”
While the RBI has reduced interest rates by 115 basis points aimed at boosting credit demand and consumption, that’s unlikely to halt Asia’s third-largest economy from posting an estimated 4.5% contraction in gross domestic product this fiscal year.
“We are ensuring that the rates are kept low, keeping in mind the inflation trajectory because maintaining inflation is our primary objective,” said Das. “As inflation is likely to remain moderate, the RBI wants to keep the rates aligned with the inflation trajectory,” he said, adding that the central bank wants to ensure there is adequate liquidity in the system and that the bond market and financial markets are functional.