Indian companies’ ability to repay loans has worsened, which is straining banks that are already burdened with bad loans, the Reserve Bank of India said in its Financial Stability Report released on Thursday.
The infrastructure sector is the most affected, accounting for about 29.8% of the total stressed loans of banks as of December 2014, the report said, adding that this is crimping banks ability to lower interest rates and boost their loan book.
“Macro stress tests suggest that current deterioration in the asset quality of scheduled commercial banks may continue for few more quarters, and public sector banks may have to bolster their provisions for credit risk from present levels, to meet the ‘expected losses’ if macroeconomic environment were to deteriorate under assumed stress scenarios,” according to the RBI report, which is the 11th such issue, prepared twice every year.
Most banks, especially public sector lenders, have been hit hard after policy stagnation delayed large projects, which in turn made loans taken to fund these projects unviable. Gross non-performing assets (NPAs) of banks have already increased to 4.8% of the total advances in March, a rise from the 4.5% at the end of September 2014.
According to the report, about 17.9% of the gross NPAs — loans that do not yield returns — came from industries, while the services sector accounted for 7.5%. The retail sector, at 2%, contributed the lowest.
The RBI was guardedly optimistic about the outlook.
After the “taper tantrums” starting mid-May 2013, when the Fed hinted at reversing its easy money policy, “a combination of global factors and concerted domestic policy decisions” have helped the country, RBI governor Raghuram Rajan said in the foreword to the report.