Banks need to gear up to meet new challenges following unwinding of measures to combat COVID: RBI

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Mumbai, Dec 29 (PTI) Cautioning of imminent stress in the banking sector after unwinding of the measures taken to combat the impact of COVID-19, the Reserve Bank on Tuesday said banks will need to adapt and adjust themselves to meet the upcoming challenges.

The Reserve Bank of India (RBI), in its report on 'Trend and Progress of Banking in India 2019-20', said that the central bank initiated timely measures to relieve stress on bank balance sheets, corporates and households following the outbreak of the coronavirus pandemic.

Observing that banking soundness indicators are obscured under the asset quality standstill, it said, banks are raising capital in preparation of the imminent stress.

'With the 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 income.

'Going forward, banks will have to adapt and adjust to the rapidly evolving economic landscape due to these challenges and also the entry of niche players and emerging financial technologies,' the report said.

Improvement in the health of the banking sector henceforth hinges around the pace and shape of economic recovery, the RBI report said, adding, 'The challenge is to rewind various relaxations in a timely manner, reining in loan impairment and adequate capital infusion for a healthy banking sector.' The report further said that in the wake of a severe and unprecedented macroeconomic shock caused by the COVID-19 pandemic, the RBI's actions veered towards providing a stimulus to the economy while ensuring financial stability.

The troika of policy rate cuts and liquidity infusion; regulatory forbearance; and time-bound resolution with additional provisions was employed to ease immediate concerns emanating from the pandemic as well as aid the economic revival going forward, it said.

RBI said the report is being issued in an environment in which the Indian economy, the central bank, and the banking and financial system are confronting the most testing challenge in more than a 100 years.

On frauds in the banking sector, the report said, operational risk has emerged as a major source of risk. Although 98 per cent of frauds in terms of value were related to loans, their occurrence was spread over several previous years.

'There was a concentration of large value frauds, with the top fifty credit-related frauds constituting 76 per cent of the total amount reported as frauds during 2019-20,' it said.

The amount involved in frauds (Rs 1 lakh and more) was Rs 64,681 crore in the first half of the current fiscal, down from 1,13,374 crore in April-September 2019-20 period. The number of cases of fraud too were lower at 3,488 during April-September 2020-21 as compared to 4,410 in the corresponding period of last fiscal.

Although around 80 per cent of the frauds involving amount of 'more than Rs 1 lakh' were reported by public sector banks (PSBs), their share in total reporting – both number of cases as well as amounts involved – declined in 2019-20, the report said.

The report noted that the moderation in gross non-performing assets (GNPA) ratio, which started after the peak in March 2018, continued through 2019-20 and 2020-21 so far to reach 7.5 per cent by end-September 2020.

The improvement was driven by lower slippages which declined to 0.74 per cent in September 2020 and resolution of a few large accounts through the Insolvency and Bankruptcy Code (IBC). Fresh slippages remained highest among the state-owned banks.

GNPA ratio of banks 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, it said.

The modest GNPA ratio of 7.5 per cent at end-September 2020 veils the strong undercurrent of slippage.

The accretion to NPAs as per the Reserve Bank's Income Recognition and Asset Classification (IRAC) norms would have been higher in the absence of the asset quality standstill provided as a COVID-19 relief measure.

'Given the uncertainty induced by COVID-19 and its real economic impact, the asset quality of the banking system may deteriorate sharply, going forward,' it said.

Capital to risk weighted assets ratio (CRAR) of scheduled commercial banks (SCBs) strengthened from 14.3 per cent at end-March 2019 to 14.7 per cent at end-March 2020 and further to 15.8 per cent at end-September 2020, partly aided by recapitalisation of public sector banks and capital raising from the market by both public and private sector banks.

As per the report, the rapid credit growth during 2005-12, coupled with absence of strong credit appraisal and monitoring standards and wilful defaults, are responsible for sizeable asset impairments in subsequent years.

Large borrowal accounts (exposure of Rs 5 crore and above) constituted 79.8 per cent of NPAs and 53.7 per cent of total loans at end-September 2020. During 2019-20, PSBs' GNPA ratio as well as the ratio of restructured standard assets to total funded amounts emanating from larger borrowal accounts trended downwards.

On the contrary, private sector banks experienced an increasing share of NPAs in respect of such accounts.

Banks also recovered over Rs 1.72 lakh crore (of over Rs 7.42 lakh crore NPAs) during 2019-20 through channels like Lok Adalats, DRTs, SARFAESI Act and IBC.

During 2019-20 and first half of 2020-21, SCBs consolidated the gains achieved after the turnaround in 2018-19, it said. PTI NKD CS RVK