The aftermath of the COVID-19 pandemic is expected to push up the gross non-performing assets in the Indian banking system to at least 12.5 per cent by March 2021, from 8.5 per cent in March 2020, a report from the Financial Stability and Development Council said on July 24.

The report suggests that the COVID-19 crisis could push Indian banks’ gross bad loans to their highest in two decades.

‘It may escalate to 14.7 per cent under a very severely stressed scenario,’ the report released by the Reserve Bank of India read.

Highlighting the uncertainty to economic growth, Governor Shaktikanta Das said that once the post-pandemic phase was reached the focus would be on ‘calibrated unwinding of regulatory and other dispensations’.

‘The challenges that lie ahead have to be addressed with the overarching objective of preserving long-term stability of the financial system, which is critical for nurturing the recovery,’ RBI governor added.

Private banks and foreign banks would also witness a spike in their bad loans on the back of worsening macroeconomic factors, the report said.

The banking industry would also see erosion of capital as banks would need to provide more against defaulters.

‘While the regulatory moratorium may be holding back some stress, the industry-wise composition of good quality loans of public and private banks reveals that some of the industries with higher share of such loans across bank groups are severely affected by the COVID-19 pandemic,’ the RBI said.

The sectors with the highest share of ‘good quality loans’, which might get hit, include general purpose loans by non-banking finance companies, generation of electricity, NBFCs in the housing sector and development financial institutions.

The Central Bank has emphasised on the need to maintain financial sector stability in a post-pandemic environment.

Recently, Former Reserve Bank of India (RBI) governor Raghuram Rajan on July 14 warned that banks are going to witness an unprecedented rise in bad debts in six months from now and the sooner the problem is recognised, the better it would be.

Also Read: Raghuram Rajan Warns Against ‘Unprecedented’ Rise In Bad Debt Levels In Six Months