RBI’s stress test results indicate high risk to asset quality: Moody’s

Singapore: The Reserve Bank of India’s recent financial stability report and results of banking system stress tests show that banks’ gross non-performing assets will rise meaningfully under all four stress test scenarios with their common equity tier one ratio declining by one to two percentage points, Moody’s Investors Service said on Thursday.

However, most banks’ capital ratios will remain above the regulatory minimum, a credit positive that reflects the banks’ balance sheets’ resilience to the stress of the coronavirus-induced economic downturn as well as government infusions of capital to-rated public-sector over the past two years.

“Therefore, even with the estimated decline, capitalisation at these banks will be higher than at the trough in 2018,” said Moody’s in its latest credit outlook report. The stress test scenarios ranged from base case to very severe corresponding to GDP of negative 4.4 per cent to negative 8.9 per cent.

The assumption of a sharp contraction in GDP growth reflects India’s nationwide lockdown in response to the coronavirus pandemic and uneven pickup in economic activity after the lockdown lifts. The lockdown began in mid-March and remains in effect.

For all banks, the gross non-performing assets ratio is modelled to increase by between four and six percentage points by March 2021 depending on the scenario. The significant increase is in line with our expectations on asset quality deterioration.

The capital estimates also do not factor in new capital raising. Private-sector banks such as ICICI Bank and Axis Bank have indicated an intention to raise capital.

“While no announcements have been made by the government for planned capital infusions in fiscal 2021 which ends March 31 next year, there is a history of capital infusion from the government to public sector banks when required,” said Moody’s.

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