With asset quality stress, mostly in mining, iron and steel, textiles, infrastructure and aviation sectors, the rising of bad loans or non performing asset (NPA) situation has not bottomed out, according to Financial Stability report, which is published six-monthly by a sub-committee of the Financial Stability & Development Council headed by the Reserve Bank of India (RBI) Governor.
“On a sectoral level, mining, iron and steel, textiles, infrastructure and aviation sectors contributed highest to asset quality stress, with such advances at 17.9 per cent,” the report said, adding that the rising NPA situation has not bottomed out. “The asset quality deterioration is likely to continue for a few more quarters,” said the report on Thursday.
The gross NPAs in the banking system have grown to 4.6 per cent at the end of March this year from 4.5 per cent in September 2014, while the stressed advances including standard restructured loans have risen to 11.1 per cent from 10.7 per cent.
According to the report, while risks to the banking sector have moderated marginally since September 2014, concerns remain over the continued weakness in asset quality and profitability.
Warning that further deterioration in asset quality can ‘adversely affect the health of the banking system’, it said under the baseline scenario, stress tests have shown that the GNPAs may increase marginally to 4.8 per cent in the September quarter of the current fiscal and then improve to 4.7 per cent by the March 2016 quarter.
The state-run lenders continued to trail private sector when it comes to asset quality, with stressed advances at 13.5 per cent as against 4.6 per cent for the private sector banks.Under the baseline scenario, the RBI report estimates that public sector banks’ gross NPAs will rise to 5.7 per cent by the end of March 2016.Rajan said, “The stress, coupled with the consequent pressure on capital adequacy, is a matter of increasing concern.”
“These 27 state-run banks have a substantial role to play for sustainable and equitable economic growth and highlighted that hence the actions taken by Government and the RBI to reduce the stress by solving legacy issues and strengthening governance structures are important.
“There has been a significant improvement in the macroeconomic environment, and going forward, economic performance is expected to be better,” the report said.However, RBI Governor Raghuram Rajan said that macroeconomic fundamentals of the country improved over the past two years and emerging market economies like India proved to be better placed to face any eventuality.“The macro-economic fundamentals have improved and we have also been able to build buffers to fight any future uncertainty,” he said, stressing that “we need to be vigilant”.“With back-to-back quantitative easing by other major central banks,alongside the possible tightening by the Fed, what we have seen might be only one of a series of such ‘tantrums’ that the global markets are likely to witness,” he added.
However, managing expectations is a challenge for policymakers as the recovery in business sentiment has not taken roots, the report has warned.Rajan has repeatedly called for policy co-ordination at global forums, saying policies in the developed world driven by domestic needs can adversely impact other developing countries in an inter-connected world.
Reiterating the need for a consensus here, Rajan said, “There is a need to be vigilant about the spillovers (of the Fed ending the near-zero interest rate regime). For India, what matters is reducing inefficiencies as also improvements in non-price competitiveness.”
As far as banking sector is concerned for macro economic scenario, the report said that while the capital ratios for the banking system improved marginally, the state-run banks have continued to record lower CRAR (capital to risk weighted assets ratio).
The FSR also said the stress levels in the top ten banks identified as systemically important are higher than the average for the system and therefore their performance will need to be “closely monitored”.Stating that the RBI front-loaded potential benefits by delivering cuts of 0.75 per cent in the first half of 2015, the FSR report said, “price pressures arising from possible sub-normal monsoon remains a significant risk to food and headline inflation.”
Even though the external vulnerabilities have come down, the report said, “We should not be complacent in an environment of continued uncertainty over global growth and absence of international monetary coordination.”In the securities market, the FSR flagged concerns over the rapid rise in algo trading, saying this highlights the need for caution, while on insurance, it said agricultural insurance needs urgent focus.