 "Decline in weak companies good for banks, says FM")
Finance Minister Arun Jaitley on Wednesday described the decline in the number of weak companies and deleveraging of stressed companies as a positive development for the banking sector as it increases th ability to pay back loans.
The comments came a day after the Reserve Bank of India (RBI) said stressed companies were deleveraging fast and the number of 'weak' companies in the economy was declining.
Briefing thereporters after the Cabinet meeting, Jaitley said operating profit of public sector banks (PSBs) stood at Rs 1.4 lakh crore in 2015-16 but, because of higher provisioning for non-performing assets (NPAs), net profit was in the negative.
In a bi-annual report of the Financial Stability and Development Council (FSDC), RBI, however, also said risks to the banking system had"worsened significantly," as companies might not be paying back loans fast enough.
"Risks to the banking sector have sharply increased since the publication of the previous stability report in December."
The report added that this was due to deteriorating asset quality and lower profitability.
RBI conducted its Asset Quality Review (AQR) last year to make banks disclose bad loans and make provisions for them. This increased the quantum of non-performing loans and provisioning significantly in the December 2015 and March 2016 quarters.
While the deleveraging process of corporate borrowers has begun, the capacity of companies to repay would move up only gradually, given the slow increase in income and business growth. The report analysed 1,800 to 2,600 listed private non-financial companies to capture the trend. It says within the sample size, the proportion of leveraged companies that have negative net worth or debt-to-equity ratio of more than two declined sharply from 19 per cent in March 2015 to 14 per cent in March 2016. These companies' share in total debt also declined from 33.8 per cent to 20.6 per cent.
Similarly, the proportion of 'highly leveraged' companies, those having debt to equity ratio of more than three, declined from 14.2 per cent to 12.9 per cent in the sample size, with the share of these companies in the total debt coming down from 23 per cent to 19 per cent, the report said.
However, a more detailed analysis of the corporate sector's performance with a larger sample of companies obtained from ministry of corporate affairs showed that profitability of both public and private companies improved in 2014-15, compared with 2012-13, while the leverage ratios increased.
