Bad loans main pain area for resilient economy: FSR

Strong macroeconomic fundamentals offer India a "reasonable degree of resilience" to fight uncertainties, but poor asset quality of banks and managing expectations are key challenges for regulators and the government, says the Financial Stability Report.
"There has been a significant improvement in the macroeconomic environment, and going forward, economic performance is expected to be better," the six-monthly FSR released by the Reserve Bank said today.
However, managing expectations is a challenge for policymakers as the recovery in business sentiment has not taken roots, the report has warned.
"A relatively stronger macro-economic fundamentals in terms of growth, inflation, and current account and fiscal deficits provide a reasonable degree of resilience to our financial system," it said.

Gross non-performing assets (NPAs) in the banking system have grown to 4.6 per cent at the end of March this year from 4.5 per cent in September 2014, while the stressed advances including standard restructured loans have risen to 11.1 per cent from 10.7 per cent, the report said.
Stating that the rising NPA situation has not bottomed out, the report warned that asset quality deterioration is likely to continue for a few more quarters.

On a sectoral level, mining, iron & steel, textiles, infrastructure and aviation sectors contributed highest to asset quality stress, with such advances at 17.9 per cent, the report said.

"While risks to the banking sector have moderated marginally since September 2014, concerns remain over the continued weakness in asset quality and profitability," the FSR said.
Warning that further deterioration in asset quality can "adversely affect the health of the banking system", it said under the baseline scenario, stress tests have shown that the GNPAs may increase marginally to 4.8 per cent in the September quarter of the current fiscal and then improve to 4.7 per cent by the March 2016 quarter.
The report is published by a sub-committee of Financial Stability & Development Council. The sub-committee, headed by the RBI Governor Rajan, has representations from the heads of other financial markets regulators like the Sebi, Irda, FMC and the PFRDA apart from the chief economic advisor to the finance ministry and the finance secretary among others.