RBI board favors new formula for stress testing

The board discussed removing the focus only on NPAs in the semi-annual stress tests of the RBI’s Financial Stability Report (FSR), the person cited above said under cover of anonymity, adding that several indicators are needed to identify emerging tensions in the system. .

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In its latest FSR released on Jan.11, RBI said gross NPAs could reach 13.5% in the baseline stress scenario by Sept.30, 2021, the highest in over 22 years, from 7.5. % as of Sep 30, 2020. It is expected to nearly double to 14.8% in a severe stress scenario.

“The issue was discussed at the meetings of the central council and the financial supervisory board. Regardless of the stress tests, which have been carried out for so many years, RBI could not avoid a crisis. It was therefore discussed that RBI should not rely on key figures and instead should have multiple indicators to warn them of impending stress in the system. Indicators such as credit disbursement, adoption of information technology in banks, etc. can be examined for a full stress test, ”said the person quoted earlier.

The scrutiny of stress tests comes after market participants expressed concerns about the quality of stress tests, which differ from projections by banks and rating agencies. According to the person cited above, stress testing should ideally prepare the system to handle a crisis by issuing early warnings.

Kotak Institutional Equities said in a Jan. 12 note to clients that the Reserve Bank’s forecast puts too much emphasis on history and that there has already been a significant default from the large corporate segment in the previous cycle. bad debts.

The report says RBI did not provide any details on stress in retail and small and medium-sized businesses (SMEs), which have been hit the hardest by covid-19.

“Given that the impact of covid-related write-downs has a significant overlap (retail and SME portfolios) between banks and NBFCs (non-bank financial companies), it seems surprising that underwriting between the two lenders is so divergent. We would have liked the discussion paper to give more details on the quality of the moratorium book (sector, duration of the moratorium adopted by borrowers, or ratings based on client profile / CIBIL score) or perhaps more information on the retail / SME portfolio likely to be under strain due to covid, ”says the Kotak report.

On November 11, Soumya Kanti Ghosh, chief economist at the State Bank of India, said in a report that the stress test needed to be revised because its projections in fiscal years 2015 to 2018 were lower than the actual numbers, while for for fiscal years 2019, 2020 and 2021, actual figures were well below projections.

This could be because the RBI data on APMs even takes into account written off loans. Since 2018, banks, especially public sector banks, have suffered significant loan write-offs.

Ghosh had also argued earlier that this year’s gross bad debt projections from the RBI and banks may differ due to the way the moratorium data is calculated.

“Some of the banks initially granted a blanket moratorium to all of their customers, regardless of their will and eligibility, and this data was initially reported as universal. However, in reality, most clients continued to pay their EMI (equivalent monthly installments) even if offered to them. Subsequently, all of these clients are put on moratorium, although they continue to pay their EMI dues, ”Ghosh said in an August report.