Banks Continue to Face Significant Levels of Stress – RBI.
Banks in India, particularly state-run ones, continue to face significant levels of stress owing to bad loans, the RBI said on Thurdsay in its December 2016 Financial Stability Report (FSR).
“The business growth of scheduled commercial banks (SCBs) remained subdued with public sector banks (PSBs) continuing to lag behind their private sector peers. System level profit after tax (PAT) contracted on y-o-y basis in the first half of 2016-17,” it said.
The risk to Indian financial system in the six months to September rose amid deteriorating asset quality at banks and lenders with exposure to top business groups with stress could see a substantial portion of their profits blown off if their top three borrowers default.
Infrastructure, iron & steel, engineering and power sectors remain in stress as they are unable to generate cash and that may force banks to hold back from lending to even productive purposes, said the twice a year released RBI’s Financial Stability Report which discusses the strength of the system and also analyses how equipped the system is to withstand shocks.
“The banking stability indicator shows that the risks to the banking sector remained elevated due to continuous deterioration in asset quality , low profitability and liquidity,” said the report. “Given the higher levels of impairment, SCBs may remain risk averse in the near future as they clean up their balance sheets and their capital position may remain insufficient to support higher credit growth.“
India’s financial system, though withstood the shock of the global financial crisis of 2008, has deteriorated substantially as corporates binged on loan at cheap rates and banks threw caution to winds. That has resulted in record-high bad loans which has eroded their capital too.
“The asset quality related pressures in the banking system is likely to continue for some more time as recovery in current environment remains challenging,” says Karthik Srinivasan, group head, financial services sector ratings at ICRA. “With slowed credit offtake, the asset quality indicators in percentage terms will continue to deteriorate.”
The proportion of gross non-performing advances ratio of commercial banks rose to 9.1% from 7.8% between March and September 2016, pushing the overall stressed advances ratio to 12.3% from 11.5%. The report also points out that the special mention accounts (SMA)-2 accounts where the loan is overdue for 60 days –increased across bank groups.
“While the domestic banking sector continues to face significant levels of stress partly reflecting legacy issues, on balance, enhanced transparency has helped to reinforce the stability of India’s financial system,“ RBI Governor Urjit Patel wrote in the report.
Stress tests on banks’ credit concentration risks, considering top individual borrowers according to their exposures, showed that the impact was significant for three banks, comprising about 3.9% of the assets, as they may fail to maintain 9% capital adequacy ratio in at least one of the scenarios, it said. The losses could be 37% of profit before tax under the scenario of a default by the topmost individual borrower and 59% in case the top two individual borrowers default.
The macro stress test shows that total bad loans of banks may increase further if macroeconomic conditions deteriorate sharply.
The stress test shows that government-owned banks may record the highest bad loans ratio and lowest capital to risk-weighted asset ratio among bank-groups although the CRAR at the system as well as bank-group levels may remain above the required regulatory minimum.