 "Stress on banking sector significant, says RBI")
The Financial Stability Report (FSR) published by the Reserve Bank of India (RBI) on Thursday raised red flags about the health of the banking sector as lenders struggle with rapid deterioration in asset quality at a time of lower business growth.
Overall, India’s financial system remains stable, but the stress on banking sector, particularly on the public sector banks (PSBs) “remain significant”, the central bank noted.
“The risks to the banking sector remained elevated due to continuous deterioration in asset quality, low profitability and liquidity,” said the biannual FSR, published by RBI after taking inputs from all financial sector regulators.
Business growth in banks remained subdued, particularly in case of PSBs, which lagged their private sector counterparts. System level profit also contracted in the first half of 2016-17.
Add to that, the gross non-performing advances (GNPA), or bad debts, ratio of banks increased to 9.1% at the end of September 2016 from 7.8% in March, pushing the overall stressed advances ratio to 12.3% from 11.5%, as “large borrowers registered significant deterioration in their asset quality” and their share in the total bad debt went up, while the share in credit came down.
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The worrying factor for banks was that the large borrowers piled up in the special mention accounts monitored for non-payment of dues between 61-90 days.
If a loan is not serviced for 91 days, it becomes a bad debt.
The GNPA ratio of banks could “increase further, if macroeconomic conditions deteriorate sharply”, the report warned, adding PSBs would record the highest bad debt ratio and the lowest capital to asset ratio, even as the capital adequacy could be well above the regulatory minimum.
Currently, the capital adequacy ratio of banks remains unchanged at 13.3%.
RBI also said banks were likely to go slow in extending credit. “Given the higher level of impairment, scheduled commercial banks may remain risk averse in the near future as they focus on cleaning up their balance sheets and their capital positions may remain insufficient to support higher credit growth,” the report said.
The degree of interconnectedness between financial institutions is on the decline, with mutual fund companies and insurance companies being the biggest fund providers in the system, while non-banking finance companies, followed by banks being the biggest receivers of funds. Credit flow to the corporate sector remained subdued as firms raised funds from the bond market.
“Some risks inherent in banks may be getting transferred to other segments of the financial markets due to increasing regulatory scrutiny and elevated capital requirements for banks,” the report said. The spillovers of global uncertainties, on the rise now, and policy actions on Indian economy are “significant though not insurmountable in view of the continued strength of macro fundamentals.”
In his foreword to the FSR, RBI Governor Urjit Patel said the rate hike in the US and rising oil and other commodity prices “increase the risk of spillover”, but domestic macroeconomic conditions “remain stable with significant moderation in inflation, though growth momentum has slackened recently.” The central bank is optimistic about the demonetisation exercise.
“The withdrawal of specified bank notes will impart far-reaching changes going forward,” Patel said, adding, the withdrawal of notes could be expected to “significantly transform the domestic economy in due course, in terms of greater intermediation, efficiency gains, accountability and transparency through increasing adoption of digital modes of payments, notwithstanding the short-term disruptions in certain segments of the economy and public hardship.”
According to FSR, India has relatively lower level of policy uncertainties.
The goods and services tax, bankruptcy law and the government’s resolve to attack the shadow economy are significant measures and should add resilience to the economy.
The FCNR deposit redemptions were carried out with relative ease and India’s foreign exchange reserves were enough to cover about 11 months of imports, a healthy parameter.
In the non-banking space, asset quality deteriorated slightly and capital adequacy also fell moderately, even as capital was much higher than the regulatory minimum. In the corporate sector, stress is on the rise as in evident by the increased incidence of share pledging by promoters.
“The percentage of shares pledged by promoters out of their holdings in all listed companies across NSE and BSE has shown a gradual increasing trend over the years,” the FSR said.
