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The Reserve Bank of India (RBI) has asked banks to step up efforts to mobilise resources, as the country readies itself for a higher-growth path, following various reform measures announced by the Centre.
This comes amid slowing growth in deposits and depleting bank capital. Against a nine-year-low domestic household savings rate in 2012-13, this financial year has seen only a marginal pick-up on this front.
“A pick-up in credit assumes importance in the present context, given credit cycles have been leading business cycles in the post-reform period,” the central bank said in its Financial Stability Report, issued on Monday. “Banks, therefore, need to prepare themselves to meet the credit demand, as investment picks up.”
As of December 12, annual credit growth stood at 10.9 per cent, the lowest since 2007, while deposit growth stood at 10.6 per cent. In 2012-13, the gross domestic savings rate stood at 30.1 per cent. The household savings rate, however, marginally improved in 2013-14, largely with respect to bank deposits and small savings.
“A revival in investment activity needs to be supported by an increase in financial savings,” RBI said.
RBI expects India’s economy to grow 5.5 per cent in the 2014-15 and pick up momentum the following year.
Noting growth in the banking system had moderated, along with a decline in profitability, the report said the lacklustre demand for credit was primarily due to the corporate sector availing of alternative sources of fund, as well as risk-aversion.
For the regulator, the biggest concern remains asset quality and high levels of stressed assets. In September, gross non-performing assets (NPAs) in the banking system rose to 4.5 per cent of gross advances, compared with 4.1 per cent in March. Between March and September, overall stressed assets in banks (gross NPAs + restructured advances) rose from 10 per cent to 10.7 per cent. “The extent of restructured assets in the banking sector, especially public sector banks, is a cause of concern. The relatively higher possibility of slippages in restructured standard advances is required to be factored in by banks from a capital-adequacy perspective,” RBI said. It added between March and September, the level of stress had increased for 46 banks, which accounted for 88 per cent of the overall loan portfolio.
As of June, infrastructure, iron & steel, textiles, mining (including coal) and aviation accounted for 52 per cent of overall stressed assets. Banks’ exposure to the infrastructure sector stood at 15.6 per cent of their total loans. RBI said in case of trouble at a single bank, the close ties between these institutions would leave the system vulnerable to contagion; trouble at any of the top five most-connected lenders in India could lead to contagion that would wipe out about half the banking system’s tier-I capital, under a severe stress scenario.
“This underscores the importance of monitoring not just interconnectedness, but also counterparties and the magnitude of exposure involved in the connection,” it said. It said its stress tests involved conditions such as potential failure by a bank that was either a net lender or a net borrower, or both. RBI also used money markets as one of its variables for stress tests. On other risks in India’s financial system, RBI highlighted the need for “closer examination” of the practice of promoters pledging a substantial portion of company shares to secure loans. It cited the need to improve project appraisal by banks, rather than by merchant bankers (which have vested interest in financial closure).
As RBI mandates all standard restructured advances will attract provisioning in line with that for sub-standard assets from April 1, 2015, this will lead to a rise in provisioning requirements, resulting in pressure on profitability. Currently, banks enjoy regulatory forbearance of lower provisioning for restructured standard advances.
