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FSR: Strong macros but banks’ stressed assets a big worry

The Reserve Bank of India on Wednesday released the twelfth issue of the Financial Stability Report (FSR) that assesses risks to the country’s financial stability as well as the resilience of the financial system.

The RBI also released the Report on Trend and Progress (RTP) of Banking in India 2014-15 (RTP) that throws light on the banking sector’s salient policy measures and performance.

In its report, the central bank said that India’s financial system continues to be stable and the relatively stronger macroeconomic fundamentals adds resilience to face the still prevailing uncertainty and emerging risks in the global economy and financial markets.

The RBI further sounded caution on the quality of assets , adding that risks to the banking sector has increased since the publication of the last FSR (June 2015) that highlighted Indian economy’s resilience, saying there was no room for complacency.

The RBI states: “Between March and September 2015, the gross non-performing advances ratio increased, whereas restructured standard advances ratio declined. Sectoral data as of June 2015 indicates that ‘industry’ continued to record the highest stressed advances ratio of about 20 percent, followed by ‘services’ at 7 percent.”

The central bank was also quick to add: “However, the policy makers and stakeholders will need to remain watchful about the potential adverse impact of developments in the global scenario particularly increased volatility in financial markets and further slowdown in global trade.”

Shubhada Rao, Chief Economist of Yes Bank expects global uncertainties, especially China and commodities related, will continue. However, decent economic performance by the USA and UK is a relief for India, she says. 

Challenges to the domestic economy, the RBI highlights, arise from erratic
climatic conditions, limited policy space, corporate performance, asset quality of financial institutions and low investment growth.

Highlights of the Report on Trend and Progress report:

– Subdued banking performance

A slowdown in balancesheet growth in 2014-15 resulted in subdued performances by the banks. While the public sector banks (PSBs) registered deceleration in credit growth, the private sector banks and foreign banks  showed higher credit growth. Retail loan portfolio of the banks continued to grow at around 20 percent during 2014-15.

Reflecting the overall growth trend, the credit growth to priority sector declined during 2014-15. While the PSBs accounted for 72 percent of total banking sector assets, they accounted for only 42 percent in total profits during 2014-15, with the private banks surpassing the PSBs in the share of total banking sector profits.

The deterioration in the asset quality of banks in general, and PSBs in particular, continued during the year.

Highlights of the Financial Stability Report:

The RBI is of the view that subsequent Fed rate hikes, sluggish global trade growth will define the global economy here on. Despite relatively stronger macro-economic fundamentals, domestic demand and private investment are still not picking up, thereby underscoring the need to step up public investments, the RBI explains.

While the current account balance has benefitted from the global crude price fall and reduction in gold imports, exports have been adversely affected due to weak external demand.

The RBI notes: “In the corporate sector, declining profitability, high leverage and low-debt servicing capacity continue to cause concern with their attendant adverse impact on the financial sector, notwithstanding a marginal improvement observed during the first half of current financial year.”

Experts, on CNBC-TV18, discussed the worsening situation of non-performing loans (NPLs) and says that despite the pick-up in growth it will take time for banks to imporve bad assets situation. 

Dr. Pronab Sen, former Pr. Adviser, Planning Commission says that bad assets issue is more structural than growth-related. Essential thing to understand is where (sectors) borrowers are putting in money, he says.

Agreeing to the view, Ananda Bhoumik, MD & Chief Analytical Office at India Ratings & Research says that performance of banks will remain subdued in FY17-18. Apart from the issue of growing NPLs, there are below radar challenges like assets under reconstruction, he adds.

Another risk is whether the government has underestimated the bad asset situation and the provision made by the authorities will be sufficient, says A Prasanna, Chief economist, I-sec PD.

However, Rao is of the opinion that risks in banking space will began receding in gradual manner since process to restrain them has been initiated by policy makers.

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