Banks to face capital shortfall of Rs 3.5 lakh crore in event of systemic crisis in NBFC sector: Fitch Ratings

The stress test examines the potential impact on banks of liquidity pressures in the NBFC sector developing into widespread failures.

Banks would face a capital shortfall of about $50 billion (about Rs 3.5 lakh crore) in the event of a systemic crisis in the non-banking financial company (NBFC) sector, according to a study by global rating agency Fitch.

“The credit profiles of the state-owned banks would come under significant pressure, and the weakest — including those with Viability Ratings in the ‘b’ range — would face heightened solvency risks without capital injections from the government,” according to a stress test conducted by Fitch Ratings.

The stress test examines the potential impact on banks of liquidity pressures in the NBFC sector developing into widespread failures.

“We assume that 30 percent of banks’ NBFC exposure becomes non-performing. We view this as close to a worst-case scenario, but the figure also reflects the proportion of the sector that we believe is characterised by riskier business and financial profiles. We also assume 30 percent of banks’ property exposure becomes non-performing, due to tight liquidity and weak sales,” it said.

The property development sector is particularly reliant on NBFC financing, it said, adding that these defaults would reverse recent progress that banks have made in reducing their non-performing asset (NPAs) ratios.

The study estimated that the banking system’s gross NPA ratio would rise to 11.6 percent by 2020-21 from 9.3 percent at 2018-19.

Increased credit costs and a weaker economic environment would result in significant losses over the next two years, it said.

“The gap would rise to about $50 billion by FY21 under the stress scenario. Banks would also be $10 billion short of the capital required to meet the regulatory minimum of 8 percent that is set to apply from end-March 2020,” it said.

Source: PTI