More banks failing stress tests, says RBI

At least 20 public sector banks having a share of nearly 60% of total assets of scheduled commercial banks (SCBS) in India might fail to maintain their balance sheets due to a whopping increase in their gross bad loans, the Reserve Bank of India said on Tuesday.

The RBI's warning note came after it conducted a number of sensitivity stress tests on SCBs to assess their vulnerabilities and resilience under various scenarios. Their resilience with respect to credit, interest rate, equity prices, and liquidity risks was analysed by the RBI based on their data in the month of March.

Bank stress tests are exercises designed to assess whether a bank or a group of banks are adequately capitalised even under adverse economic scenarios. Such tests are being conducted by the international Monetary Fund (IMF) since the 1990s, but have gained prominence following the global financial crisis in 2008.

RBI conducts the tests on PSBs periodically but does not let out the names as it may adversely impact their performance.

The sectoral test on credit risk arising from exposure to the infrastructure sectors specifically power, transport and telecommunication as well as textiles and engineering showed PSBs had the maximum exposure to these sectors and also account for the highest gross NPAs, particularly in the power and the telecom sector.

The results of the stress tests show that among the considered sectors, the most severe shock to the power sector will cause the banking system GNPAs to rise by about 68 basis points.(One basis point is a hundredth of a percent).

The textile and the engineering sectors, though small in terms of total advances to that sector as compared to the infrastructure sector, also exhibited considerable transmission of stress to the banking, the RBI data showed.

Essentially, stress tests are meant to be “what if” exercises.