RBI released Financial Stability Report last Friday (24th July 2020), which stated that Indian banks GNPA (Gross Non Performing Assets) will reach 12.5% by end of March 2021 in the base movement scenario. Currently, GNPA is at 8.5%. RBI also stated, in severe worse cases it may touch 14.7%. Finally, in their report RBI stated that, if this situation becomes worst, 5 banks will fail to maintain the minimum capital level by end of FY21.
The test which is used to check the health of the financial system of a country, and testing done on banks, whether they can survive during a recession or pandemic period as most of their clients might lose their job, close their business and currently EMI moratorium. Stress test primarily looks at two things,
1. Solvency – Is the bank have enough capital adequacy to handle their losses in these situations.
2. Liquidity – The validation process to check, they have enough capital to pay for their deposits and debts.
CAPITAL ADEQUACY RATIO OF BANKS:
CAR is used to a predominant checker for a bank’s health on maintaining sufficient capital assets at risk. It is calculated by the addition of Tier 1 and Tier 2 Capital divided by Risk-weighted assets. Even we use to advise investors to check at capital adequacy ratio before buying bank equity shares.
Tier 1 Capital – Shareholder’s equity and retained earnings.
Tier 2 Capital – revalued reserves, undisclosed reserves, and hybrid securities.
The CAR of FY2019-2020 was at 14.6%, which is forecasted to be at 13.3% by March 2021 in normal cases. If it is calculated with severs worse case it will decline more towards 11.8%.
Ideally, when a bank has CAR more than 15%, it will attract investors.
PUBLIC SECTOR BANKS:
The most affected banks by GNPA is the PSU banks, which is currently at 11.3% at March 2020. The reason is majorly due to the loan moratorium announced by our RBI governor from March 2020 till August 2020, as most of the industries and services sectors, are heavily affected by COVID-19 crisis and nearly only a few sectors have started its cash flow into, in terms of repaying the loan is carried by the moratorium and the GNPA in high peak. Public sector banks are not in the position to lend any more loans further as their NPA counts increases, this is the sign which lead bank to no earnings in the FY2020-21.
In case of depositors pull out their savings amount, the bank will become severe loss or it has to sell its bond to maintain its operation.
PRIVATE SECTOR BANKS:
Most of the private sector, banks have enough capital as they sold their stakes in share market, but there they can’t do more to handle enough cash with them. Anyhow their NPA is currently at 4.2% which is projected to be at 7.3% at the end of FY2021. As you may be aware that ICICI Q1’2020 result was in the positive note is completely because of pledging their own stakes.
The main reason, which private sector banks are not in a worse situation as public sector banks is due to their criteria in offering the loan. They majorly focused on personal, bike, car, and credit card loans. In a few cases, they also invested in home loans. As they have targeted salaried and cash flow people, the EMI moratorium was not a big burden to them. Most of the banks collected the month EMI regularly from their salaried customers. The only place where they suffer from NPA is the loans they offered for home and business.
Even public sector banks will now operate with more care on providing loans, as their GNPA burden should not rise higher.
NON – BANKING FINANCIAL SECTORS:
This sector is completely affected by this COVID crisis, as these sectors have a big market in housing loans. The ILFS – India’s leading housing and infrastructure finance company became default to its investors which ultimately made a huge rise in GNPA of public sector banks.
Currently, these sectors will be a shortfall on receiving a loan from both public and private sector banks, as the private sector never lend a huge amount of money to NBFC’s and public banks are in the highest peak of its GNPA.
This made this sector to be under non-performing as the cash flow ultimately decreases when compared to FY2019-20. Now, these companies will be looking to provide only good quality loans.
MESSAGE TO INVESTORS:
· Most of the countries have printed currencies to handle this crisis, which will increase the inflation over the current financial year.
· After these measurable steps, most country’s share markets are moving in positive currently while compared to January 2020. In India, it is still showing a negative trend when compared to Jan’2020
· After the march great fall, the market become to move in a bullish trend, the major reason is due to the rights issue and stakes sold by top companies of India.
· Before looking at bank stock, kindly look at its Book value, CAR (Capital Adequacy Ratio), GNPA(Gross Non Performing Assets)
· The stress has been conducted by RBI to check the health condition of our financial and banking industry
· The GNPA which is currently at 8.5% is likely to move towards 12.5% by March 2020 and even to 14.7 is severe worse case.
· Even the CAR is likely to be declined from 14.6% to 11.8% in a severe worse case.
· Always, be strong in fundamentals, look and learn the business before investing in bank stock.