Evaluate the Strength of PSU

Banks’ Balance Sheet using

Stress Testing

Prof. Dr. Suyash Bhatt

Head Innovation & Entrepreneurship – Professor Finance
Prin. L. N. Welingkar Institute of Management Development
and Research
Introduction
India’s NPAs Stressed
and the global Financial Crisis IBC – Delay in Balance Sheets
standing judgments of PSBs

Stress Testing Objectives of the Study

• Alert system for bank management • To comprehend Public sector banks’

• Dual role: Diagnostic tool and A forward balance sheet currently going through
looking element stressed assets turmoil
• Indication to how much capital might be • To understand Stress testing model and
needed to absorb losses if the shocks occur building analytical capabilities on
• Sensitivity and Scenario Analysis fundamentals reading
• RBI guidelines for all Scheduled Commercial • To understand the parameters that put
Scope of the Study

Tests performed on the financial data as on 31.12.2019

Stress Testing Model
The Stress tests of the sample banks would be operated under three hypothetical
scenarios:
i. Scenario 1 - Minor Level Shock
ii. Scenario 2 - Moderate Level Shocks
iii. Scenario 3 - Major Level Shocks

Shock levels:
Risk Scenario 1 Scenario Scenario 3 Impact gauged
2 on
1. Credit Risk
a. Increase in NPA 0.5% 1% 1.5% CRAR

b. Credit 3% 5% - CRAR
Concentration
2. Liquidity Risk 10% 20% 30% LCR
3. Equity Price Risk 10% 20% 30% CRAR
 Data Analysis and Interpretation
Credit Shock: Increase in NPAs
Bank Wise Distribution
(CRAR in
With Stress: Revised %) Adequacy Ratio (CRAR) in
Capital
%
CRAR Range

6 4
4 Without Stress Scenari Scenari
3 Scenari 3
2
2 1
0
CRAR 1 o1 0 o2 o3 1 1 1
0 (Regulatory
7-7.5 7.5-8 8.8.5 8.5-9 9-9.5 9.5-10 10-10.5 10.5-11 11-11.5 11.5-12 12-12.5
Requirement Fall in
No. of Banks Need of
as per Basel potenti
Fall in Fall in Additional
Names Of Norms III = 8%, al
Sr. No potential potential Capital
the Banks as per RBI threat
Credit Shock: Increase in NPAs
threat if threat if Requireme
mandate = 9%, if
Chart 1 (Figures in %)
0.50% 1.00% revised 1.50% revised nt
13.4
RBI revised
15.0 12.9 12.7 12.5 12.5 12.4 12.4 12.0 12.9 12.4 CAR <9% 12.0 12.1 11.6CAR
12.3<9%
12.3 11.6 11.8 11.1 11.8 12.2
emphasises CAR
10.0 12% CRAR for <9%
PSBs)
5.0

0.0
CRAR without stress Scenario 1 SBI IDBI BOI VB  11.55%Scenario 2 Scenario 3
1 SBI 12.88% 12.44%   12.00%   No
2 IDBI 12.66% 12.36%   12.06%   11.75%   No
3 PNB 10.52% 10.07% Credit Shock:
  9.62%Increase in   NPAs
9.17%   No
4 BOB 12.62% 11.26% Chart 2 (Figures
  10.78% in %)   10.30%   No > Safe
10.0 5 CB 8.9 9.3 12.21% 11.76%   11.30%
9.0   10.84%   8.6 No 12%   8.2 Zone
8.4 7.9
8.0 6 BOI 12.48% 12.02%   11.55%   11.08%   No 7.4
9% - Unsafe
6.0 7 UBI 11.43% 11.00%   10.56%   10.11%   No 12%   Zone
4.0 8 IOB 8.86% 8.37%   7.88%   7.39%   Yes 1.61% Under
2.0 9 UCO Bank 9.33% 8.95%   8.58%   8.19%   Yes 0.81% < 9%   threat
0.0
10 Corp BK without stress
CRAR 11.12% 10.71% Scenario 1  10.31%   9.89%
Scenario  2 No Scenario 3
IOB UCO Bank
 Data Analysis and Interpretation
Credit Shock: Credit Concentration
With Stress: Revised Capital Adequacy Ratio (CRAR)
Bank Wise Distribution
in %
(CRAR in %)
Scenario Scenario
Without Stress
CRAR (Regulatory 1 3 2
3
Requirement as Fall in
CRAR Range

2 2 Fall in 2 2
2 per Basel Norms potentia Need of
Names Of potential
Sr. No 1 III = 8%, as per1 l threat Additional
1
1 the Banks threat if
RBI mandate = if Capital
0 revised
0 9%, RBI 3% revised 5.00% Requiremen
7-7.5 7.5-8 8.8.5 8.5-9 CRAR 9-9.5 CRAR 10-10.5
9.5-10 10.5-11 11-11.5
emphasises 12% t
<9%
CRAR for PSBs) <9%No. of Banks

Credit Shock: Credit Concentration

1 SBI 12.88% (Figures
11.90%in %)   11.24%   No
14.0 2 IDBI 12.66% 10.65%   9.25%   No
11.4 11.7
12.0 3 PNB 10.6 10.52%10.2 9.89%   9.46%  
10.0 No
9.3 9.8 9.1 9.4
10.0 4 BOB 12.62% 11.52% 8.1   10.77%   8.6 No 8.0 > 8.8 8.8 Safe
8.0 5 7.3 12%   Zone
BOI 12.48% 11.72%   11.21%   No
6.0
4.0
6 UBI 11.43% 9.78%   8.64%   Yes 0.36% 9% - Unsafe
2.0 7 UCO Bank 9.33% 8.15%   7.35%   Yes 1.65% 12%   Zone
0.0 8 Corp BK 11.12% 10.27%   9.69%   No Under
CRAR without stress Scenario 1 Scenario 2
Allahabad < 9%   threat
9 10.59% 9.08%   8.04% Yes 0.96%
Bank UBI UCO Bank AB Andhra  
DB
 Data Analysis and Interpretation
3. Liquidity Risk
With Stress: Revised Liquidity Ratio (LCR) in %
Scenar Bank Wise
ScenaDistribution Scena
Without io 1 (LCR in rio
%) 2 rio 3
5
Stress LCR
4 Fall in Fall in Fall in
4 (Regulator Need
potenti potentia potenti
LCR Range

3
y of
Sr. 3 Names Of al LCR if l LCR if al LCR 2
2 Requireme Additio
No the Banks the1 the if the
1 nt as per 10.00
0 20.00 0 30.00
0 0
nal 0
revised revised revised
0 Basel % % 175-200 % HQLA
75-100 100-125 125-150 LCR
150-175 LCR 200-225 LCR
225-250 250-275 275-300
Norms III =
<100% <100%
No. of Banks <100%
100%)

Liquidity Risk
1 SBI 141% 128%  (Figures
117% in %)   108%   No
2 IDBI 107% 98%   90%   83%   Yes
123
1203 PNB 107 138% 126% 112   115%   106%   No
99 98 102 94
4 IOB 383% 348%   90 319% 90   294%  82 No 83 76
805 Corp BK 152% 138%   126%   117%   No >
40 Allahabad
100 Safe
226% 206%   189%   174% %   Zone
6 Bank   No
07 Vijaya Bank 123% 112% <
LCR without stress Scenario 1   102%   Scenario
94%2   Yes Scenario 3
100 Under
Syndicate
132% 120%   IDBI110%
VB Andhra   101% %   threat
8 Bank   No
 Data Analysis and Interpretation
4. Equity Price Risks
With Stress: Revised Capital
Bank Wise Adequacy Ratio (CRAR) in %
Distribution
(CRAR in %)2 Scenario
Without Scenario 1 Scenario
3
CRAR Range

4 Stress CRAR 3 3 3
1 2 1
(Regulatory 1 1 1 1 1 1
0Requirement Fall in
7-7.5 7.5-8 8.8.5 8.5-9 9-9.5 9.5-10 10-10.5 10.5-11 Need of
11-11.5 11.5-12 12-12.5
as per Basel potentia Fall in Fall in
No. of potential
Banks Additional
Sr. Names Of Norms III = l threat potential
Capital
No the Banks 8%, as per if threat if threat if
Requireme
RBI mandate 10.00% revised 20.00%
Equity revised
Price Risk 30.00% revised
nt
= 9%, RBI CAR Chart 1 (Figures CARin<9%%) CAR <9%
15.0 12.9 12.6 12.5 13.4 12.5 12.0 12.1 12.1 13.0 12.2 12.5 12.0 12.1 11.7
emphasises <9% 11.1 11.5 11.7 10.2 10.9 11.3
10.0 12% CRAR for
5.0 PSBs)

0.0
CRAR without stress Scenario 1 Scenario 2 Scenario 3
1 SBI 12.88% 12.01%   11.13%   10.23%   No
SBI BOB BOI VB SB
2 IDBI 12.66% 11.18%   9.66%   8.08%   Yes 0.92%
3 PNB 10.52% 10.02%   9.52%   9.01%   No
4 BOB 12.62% 12.07%   Equity
11.51% Price Risk   10.94%   No
5 CB 12.21% 11.86%   Chart
11.51%2 (Figures  in %)11.15%   No
15.0 12.7 11.2
6 BOI 8.9 12.48%
9.3 10.2 12.08%  
8.8 11.67%
9.8 9.7   11.26%  9.4 No 9.0
10.0 8.3 7.8 8.2 8.1 7.7
7 UBI 11.43% 11.19%   10.94%   10.70%   No 7.3 > Safe
5.0
8 IOB 8.86% 8.35%   7.83%   7.30%   Yes 1.70% 12%   Zone
9 0.0
UCO Bank 9.33% 8.78%   8.23%   7.67%   Yes 1.33% 9% - Unsafe
CRAR without stress Scenario 1 Scenario 2 Scenario
12%3   Zone
10 Corp BK 11.12% 10.69%   10.26%   9.83%   No
IDBI IOB UCO Bank DB < Under
Allahabad  
11 10.59% 10.24%   9.88%   9.52% No 9%   threat
Conclusion
First, it can be said that devising stress test the banks’ risk managers can identify and recognize
the character of firm’s exposure as well as the relative strengths and weaknesses of stress test
analysis to better simulate the risks at different hypothetical economic crises.
Second, by interpreting the results, the banks can assess their relative capital strength in terms of
other banks in the banking sector.
Third, the banks would be in a position to establish a capital buffer (shock absorbers on capital) to
defend their risk appetite under stress conditions.

Asset Quality Control

Government Capital
better that Asset
Infusion Programme
Recovery