 "Risks to banking sector have increased in past half-year, says RBI")
The Reserve Bank of India (RBI) believes that the risks to the banking sector have increased during the past half-year. “The risks to the banking sector have further increased during the past half-year. All major risk dimensions captured in the Banking Stability Indicator show increase in vulnerabilities in the banking sector,” said RBI's Financial Stability Report released on Monday.
As per the report banking stability measures, based on co-movements in banks equity prices, also indicate that the distress dependencies within the banking system have risen during this period.
RBI is of the view that failure of a major corporate or a major corporate group could trigger a contagion in the banking system due to exposures of a large number of banks to such corporates. “The analysis shows that interconnectedness in the banking sector could cause losses due to contagion, over and above the direct losses on account of failure of large corporate groups,” said RBI in the report.
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RBI is also concerned about the asset quality of banks. “Macro stress tests on credit risk suggest that if the adverse macroeconomic conditions persists, the credit quality of commercial banks could deteriorate further,” said RBI. But the report also adds that under improved conditions, the present trend in credit quality may reverse during the second half of 2014-15 with gross non-performing assets(NPA) ratio expected to rise initially to around 4.6 per cent by September 2014 from 4.2 per cent as at end September 2013, which may subsequently improve to 4.4 per cent by March 2015.
According to the results of RBI's systemic risk survey during October, global risks and domestic macro-economic risks were perceived to be the two most important factors affecting the stability of Indian financial system. “On the domestic macro-economic front, deterioration in economic outlook is considered to be the most critical. Risk from domestic inflation, corporate leverage and household savings have also increased marginally. On the other hand, risks arising from current account deficit, fiscal, sovereign downgrade and infrastructure were perceived to have receded,” said the report.