With deterioration in asset quality and lacklustre profit growth in corporate, the risks have risen in the last six months in the banking sector, showing an increase in the level of bad loans, held particularly by State-run banks over the next year. With such developments, country’s central bank has said that the financial system needs closer monitoring for checking these vulnerabilities.
“Despite recent improvements in key profitability indicators, deteriorating credit profile and weak balance sheets of large debt-heavy companies in the country may pose a risk to financial stability, according to the semi-annual Financial Stability Report (FSR) released by the Reserve Bank of India (RBI) on Wednesday.
Supporting the FSR survey, even RBI Governor Raghuram Rajan has said in the foreword that corporate sector vulnerabilities and the impact of their weak balance sheets on the financial system need closer monitoring.
The FSR, published by the central bank twice a year, gives an assessment of how banks withstand different levels of stress and takes stock of the developments of the financial sector and its regulations.
As far as the corporate is concerned, the report has said that 15.8 per cent had weak balance sheets out of the total 2,711 companies, with an interest coverage ratio of less than one. Interest coverage ratio (ICR), or the ratio of earnings before tax, interest and depreciation (EBITDA) to interest payments due, is a benchmark of a company’s ability to service its debt.
“Debt servicing capacity measures in terms of the interest coverage ratio declined in the case of public limited companies. Among the private limited companies, ICR of medium-sized companies increased though the same declined marginally in the case of small companies,” the report added.
In the report, the RBI has also said that leveraged weak companies with lower debt servicing capacity and high debt levels may put pressure on the already deteriorated asset quality of bank loans in adverse situations. The central bank expects gross non-performing assets (NPAs) of commercial banks to rise to 5.4 per cent by September 2016 from 5.1 per cent as of September this year as a baseline case. Under different levels of stress, the jump in bad loan ratio could be bigger.
While steps taken for developing corporate debt markets in India are showing some results, the dependence on bank finance continues even as the banks, especially the public sector banks (PSBs) face challenges on asset quality, profitability and capital. “In addition to the focus on governance processes through initiatives like ‘Indradhanush’, the PSBs may need to review their business models, and examine strategic decisions like capital planning and dividend policy,” it added.
The bad loan problem continues to mount as gross non performing advances rose to 5.1 per cent as of the September quarter from 4.6 per cent in March 2015. According to the Financial Stability Report (FSR) released by RBI,
Banks’ net NPAs as a percentage of the total net advances increased to 2.8 per cent as of September from 2.5 per cent in March.
However, following the end of Corporate Debt Restructuring (CDR) cell, restructured standard advances as percentage of gross advances declined to 6.2 from 6.4, but stressed loans ratio increased to 11.3 from 11.1 per cent in the same period.
“Public sector lenders recorded the highest level of stressed assets at 14.1 per cent followed by private sector banks at 4.6 per cent and foreign banks at 3.4 per cent,” the report said.
As of September 2015, 34 banks with 12 per cent share in advances showed very low stressed advances ratio of less than 2 per cent, whereas 16 banks with 27 per cent share in advances had high stressed advances ratio of over 16 per cent.
However, sectoral data as of June 2015 indicate that among the broad sectors, industry continued to record the highest stressed advances ratio of about 19.5 per cent, followed by services at 7 per cent. The report also said that five sub-sectors -- mining, iron & steel, textiles, infrastructure and aviation, which together constituted 24.2 per cent of the total advances as of June 2015 -- contributed to 53 per cent of the total stressed advances.
Stressed loans in aviation sector rose 61 per cent in June 2015 from 58.9 per cent in March, while stressed advances in the infrastructure sector increased to 24 per cent from 22.9 per cent during the same period.