Context: According to RBI Indian banking system has performed better than the expectation during the pandemic but it is still far from full recovery and there are still impending threats.
How has banking sector performed during the pandemic?
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The asset quality of banks has improved over the past year.
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Banks gross non-performing assets (GNPAs), which had begun to decline before the pandemic are still declining.
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Banks have seen an improvement over the past year in capital buffers and provision coverage ratios.
Concerns:
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Bad Loans: Pandemic is still not over and there still are evolving risks.
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Post Withdrawal threats: Currently, banks are getting support through lot of monetary and fiscal measures, but banks need to prepare themselves for the post withdrawal phase.
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The improvement is predominantly due to write-offs (banks wrote off Rs 2.08 lakh crore of bad loans), and policy measures taken by the central bank to lessen the fallout from the pandemic.
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SMA-2 (special mention accounts where the principal or the interest payment was overdue for 61-90 days) have risen, signalling impending stress.
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Stress is also building up in the MSME category.
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Bad loans may increase in the coming months. As per the financial stability report, GNPAs could rise to 8.1% by September 2022 under the baseline scenario.
Way Forward:
Banks may thus need “higher capital infusion” to meet credit requirements and deal with the challenges.