There is “a growing disconnect between the movements in certain segments of financial markets and real sector activity,” RBI Governor Shaktikanta Das wrote in the latest Financial Stability Report. “Once we enter the post-pandemic phase, the focus would be on calibrated unwinding of regulatory and other dispensations.’’
RBI Governor’s warning comes amid a strong rally in equities when the lockdown has led to shuttering of businesses for months and loss of income. Economists are forecasting the gross domestic product to shrink more than 5 percent and a surge in defaults. But the benchmark Sensex has climbed more than 45 percent since its March lows. The central bank has declared moratorium on payments for six months till August end.
While the RBI’s Financial Stability Report does not provide an assessment of what could be impact of the moratorium on banks, it has warned that banks could see a spike in defaults. It said in the first few weeks of moratorium nearly half the borrowers across the spectrum availed the benefit. Bank have since said that these have been falling as cash flows improve.
“The regulatory dispensations that the pandemic has necessitated in terms of the moratorium on loan instalments and deferment of interest payments may have implications for the financial health of SCBs,’’ it said.
The bad loans situation that has been easing for the past few quarters could climb again.
“The stress tests indicate that the GNPA (gross non performing asset) ratio of all banks may increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021 under the baseline scenario,’’ it said. “If the macroeconomic environment worsens further, the ratio may escalate to 14.7 per cent under the very severely stressed scenario.’’
The central bank since March has come up many measures including interest rate cuts and flooded the market with liquidity. But still government finances could get out of shape, it said.
“Central Government finances are likely to suffer some deterioration in 2020-21, with fiscal revenues badly hit by COVID-19 related disruptions even as expenditures come under strain on account of the fiscal stimulus,’’ the FSR said.
Yet another disturbing trend in the financial markets is the slowing of deleveraging by corporates and unproductive use of borrowed funds.
“Deleveraging by the private corporate sector over the recent years stalled during the second half of 2019-20 as leverage ratios (measured by the debt to asset ratio) increased due to higher borrowings,’’’ it said. “Incremental borrowings were used towards creating financial assets (loans and advances to subsidiary/ other companies and financial investments) and not for capex formation, as demand conditions remained muted.