The Reserve Bank of India (RBI) has raised concern about the harp rise of stressed asset in the infrastructure sector which has shot up from 8.4 % to 29.2% in one year till March 2014, in its annual report 2013-14 released today.
According to the central bank although stressed advances of the banks have declined marginally to 10 % of total advances in March 2014 from 10.2 % in September 2013, infrastructure sector’s contribution has shot up.
The central bank also says that even at 10%, the stressed advances remain high.
The rise of stressed asset was sharp despite the share of advances to infrastructure sector increased only by 0.9 % to 14.4% at the end of March 2014.
Iron and steel, textiles, mining (including coal), aviation along with infrastructure accounts for about 24 % of total advances but they comprise over half of the stressed assets.
“This implies that the stress rate of infrastructure, which was much less than the average is now over twice that of the overall portfolio. Over a fifth of all infrastructure advances are stressed and in stress tests of credit risk exposure to sectors, infrastructure impacts banks most severely on account of potential losses on future assumed impairments,” said RBI in the annual report.
The regulator has warned that it is important for the industry not to repeat the mistakes committed in the past where a push for the infrastructure projects, several of which were stalled later, had led to an increased growth in Gross Non Performing Assets (GNPAs).
The report also states that the credit quality of banks has weakened significantly and specifically there has been deterioration in NPAs for both Public Sector Banks and Foreign Banks. Gross NPAs has increased from 2.4 % of gross advances in March 2011 to 4.1 % in March 2014, as per the report.
The capital adequacy ratio (CAR) has also declined from 15 % in December 2009 to 13 % in March 2014.
In order to stall the growth of infrastructure sector’s contribution to stressed assets in the banking sector, RBI recommends that there is a need for a more supportive legal infrastructure that help in addressing the issue of asset quality.
The central bank has also recommended that it is necessary to also revamp the contractual relationship between private firms and the government in the infrastructure sector in order to strengthen the infrastructure sector.
The broad principle in such scenarios should be to allocate such risks that can be controlled or managed by the private sector to them, but many current contracts do not fully reflect this principle and this should be tackled, said the report.
In order to boost the infrastructure sector, Government and the RBI has come out with steps in the past few months and he said that more things needs to be done to ensure an effective growth of the sector.
In the budget, the government had said that the Real Estate Investment Trusts (REITs) would soon be allowed to bolster the growth in the real estate sector.
Apart from this, Rs 4,000 crore was allocated for low-cost housing and Rs 50,000 crore was set aside for urban housing. On the individual front, housing loan rebate on self-occupied property was increased from Rs 1,50,000 to Rs 2,00,000.
On the other hand, RBI has recently exempted banks from maintaining cash reserve ratio and statutory liquidity ratio for funds that are raised through long term infrastructure bonds for financing affordable housing and infrastructure sector.