As many as nine non-banking finance companies (NBFCs) from a sample of 152 could see their capital adequacy ratio fall below the regulatory minimum requirement, under the baseline scenario of Reserve Bank of India’s (RBI) stress testing, where it assesses the resilience of the sector to credit shocks, the financial stability report of central bank revealed.
The tests were carried out under a baseline and two stress scenarios – medium and high risk, with an increase in slippage ratio by 1 standard deviation (SD) and 2 SDs, respectively, RBI said. The baseline scenario is projected for one year ahead, based on assumptions of business continuing under usual conditions
According to RBI’s report, under a medium risk shock of 1 SD increase in the slippage ratio, the gross non-performing assets (GNPA) ratio of the NBFC sector would increase to 6.9 per cent and the resultant income loss and additional provisional requirements would reduce the Capital to Risk-Weighted Assets Ratio (CRAR) by 58 bps.
The capital adequacy ratio of the sample NBFCs in September 2022 stood at 26.0 per cent and the GNPA ratio at 4.0 per cent.
Under the high-risk shock of 2 SDs, the capital adequacy ratio of the sector would decline by 85 bps relative to the baseline to 22.6 per cent.
The number of NBFCs that would fail to meet the minimum regulatory capital requirement of 15 per cent would increase to 10 and 13 under medium and severe stress scenarios, respectively, the report said.
As far as liquidity risk is concerned, RBI’s stress test shows, the number of NBFCs which would face negative cumulative mismatch in liquidity over the next one year in the baseline, medium and high risk scenarios stood at 8, 26, and 47 (24.0 per cent), respectively.