E-Paper
Banks’ health deteriorating, stress buster must: Rajan
MUMBAI: The stress in the banking sector, which mirrors the stress in the corporate sector, has to be dealt with first in order to revive credit growth, Reserve
MUMBAI: The stress in the banking sector, which mirrors the stress in the corporate sector, has to be dealt with first in order to revive credit growth, Reserve Bank of India governor Raghuram Rajan said on Tuesday in a forward to the central bank’s Financial Stability Report.
According to the report, a bi-annual document that provides an assessment of the risks to India’s financial stability, the risks to the Indian banking sector has increased sharply in the last six months. This could result in gross non-performing assets (NPAs) — loans that do not yield returns — rising to 8.5% of total advances by March 2017, from 7.6% in March 2016.
If macro scenarios deteriorate further, gross NPAs could further increase to 9.3% by March 2017 under a “severe stress” scenario, and public sector banks are likely to continue to register the highest gross NPA (GNPA) ratio, the report added.
“We need to deal with legacy issues that hold back growth and bring changes to enhance the efficacy of our business processes and conduct. The evolving framework for the domestic financial system needs to ensure efficient risk sharing, intermediation, as also effective transmission of monetary policy signals,” Rajan said. “Policymaking in this challenging global environment could result in decisions that can have negative spillovers to other countries. Although India stands out in terms of relatively stronger growth and improved economic fundamentals, we need to stay on the path of sound domestic policies.”
The GNPA ratio increased to 7.6% at the end of March 2016, from 5.1% at the end of September 2015, the report said. Total stressed assets rose to 11.5% of banks’ combined loan book.
While retail loans continued to witness least stress, metals and metal products accounted for the highest stressed advances ratio, followed by construction and textiles. Infrastructure, however, showed improvement, with the stressed advances ratio declining to 16.7% from 21.8%.
Policy paralysis and lack of government clearances have stalled various large projects, affecting the financials of companies, who had borrowed heavily to set up the projects.
Six month earlier, the central bank had conducted the first asset quality review (AQR), flagging concerns over weak corporate balance sheets. Provisioning for bad loans resulted in banks reporting huge losses during the January-March quarter. The review was conducted on 36 banks (including PSBs), which accounted for 93% of all banks’ gross advances or loans.
According to the latest report, public sector banks may also see their capital adequacy ratio drop to 10.3% by March 2017, from 11.6% in March this year. Capital adequacy is an indicator of a bank’s financial strength expressed as a ratio of capital to risk-weighted assets.
RBI said such a projection is based on the assumption that there will be further NPA recognition (after the review).
Emphasising the ill-health of government banks, the report said PSBs continued to hold the highest level of stressed advances ratio at 14.5%, while private and foreign banks recorded stressed advances at 4.5% each.
