Bad Loans Problem May Worsen Due To Slowdown, Says RBI report

India’s financial system remains stable despite the weakening economic growth, the Reserve Bank of India said on Friday, but at the same time, it acknowledged that the revival of twin engines of consumption and investment while being vigilant about spillovers from global financial markets remains a critical challenge going forward.

The RBI in its Financial Stability Report warned that economic slowdown could worsen gross bad loans problem next year. 'The banks’ gross non-performing assets (GNPA) ratio may increase from 9.3% in September 2019 to 9.9% by September 2020, primarily due to change in macroeconomic scenario, marginal increase in slippages and the denominator effect of declining credit growth,' the RBI report said.

The banking sector’s resilience has improved, but risks arising out of global/domestic economic uncertainties and geopolitical developments, however, persist, the report said.

RBI releases Financial Stability Report. It states 'India’s financial system remains stable notwithstanding weakening domestic growth; resilience of banking sector has improved. Risks from global/domestic economic uncertainties & geopolitical developments, however, persist' pic.twitter.com/rUtFozRUUU

— ANI (@ANI) December 27, 2019

As regards the domestic economy, the RBI report said aggregate demand slackened in Q2 of FY20 further extending the growth deceleration. 

The report also said credit growth for overall banking sector remained subdued at 8.7% year-on-year in September 2019, however private banks registered a double-digit credit growth of 16.5%.

The RBI said it has taken several policy measures to improve the condition of the financial system. “Reserve Bank has initiated policy measures--to introduce a liquidity management regime for non-banking finance companies (NBFCs); to improve the banks’ governance culture; for resolution of stressed assets and for the development of payment infrastructure," the report said.

The issue of bad loans, which slowed the performance and growth of private, public-sector banks and even non-banks, has largely been tackled under the Insolvency and Bankruptcy Code (IBC). “The Insolvency and Bankruptcy Board of India (IBBI) continues to make steady progress in the resolution of stressed assets," the report said.

Read the report here