Editorial. Good to see FSR going beyond reported financials  

The global economy and financial system are not yet out of the woods despite warding off recession in 2023. But India’s banking and financial system have successfully weathered domestic rate hikes and global shocks. This seems to be the main message from Reserve Bank of India’s latest Financial Stability Report (FSR) for six months ending September 2023.

The report presents data to show that not just banks, but also NBFCs, are sitting pretty with healthy capital buffers, strong asset quality and high provision cover — with net non-performing assets (NPAs) at decadal lows (0.8 per cent for banks and 1.5 per cent for NBFCs). Yet, recent Reserve Bank of India (RBI) actions curbing bank lending to NBFCs and Alternative Investment Funds, show that despite the picture of health conveyed by reported numbers, it is worried about certain areas of stress. On the positive side, after performing the usual stress tests the FSR finds that not a single commercial bank would breach minimum capital norms even in case of a severe macroeconomic shock. Similarly, a 250-basis point rise in yields would cause only one bank to fall short of capital. The FSR does not seem to have found any overt evidence of rising delinquencies in unsecured retail loans by banks. Banks have reported a fall in GNPAs on unsecured retail loans from 2.5 per cent to 2 per cent in the past year. Yet trouble seems to be lurking in the ‘divergent underwriting practices’ of NBFCs which banks fund, under co-lending tie-ups.

With 90 per cent of NBFC retail loans being given out by smaller, less-regulated Investment and Credit NBFCs, RBI admits to challenges in identifying systemic risks here. Stress testing of NBFCs reveals that they are not as well-placed as banks to handle a spike in defaults. In a severe stress scenario, 21 NBFCs of the sample of 146 would fall short of capital. There is also evidence that the scramble among lenders for consumer credit is leading to a dilution of underwriting standards. The FSR notes that 7.3 per cent of all customers availing personal loans below ₹50,000 were already in default of one loan and 42.7 per cent of those taking consumption loans were already servicing as many as three loans. About 8.2 per cent of personal loans turned delinquent within a year of origination. Apart from pinpointing where risks lie, this data offers a counter-point to the narrative that households are on a borrowing spree because they are sanguine about their future. Outside of consumer loans, pain points exist in MSME loans particularly the ECLGS rolled out during Covid (GNPA of 6.5 per cent) and agricultural loans, where GNPA is already at 7 per cent.

It is good to see the FSR going beyond reported financials to try and identify segments where the next credit bubbles could be building up. However, if the RBI believes that lenders are downplaying default risks, it will need to undertake Asset Quality Reviews. When it comes to dealing with asset quality, a stitch in time saves nine.

COMMENT NOW