Mumbai, Dec. 30: The Reserve Bank of India today raised another red flag on bad assets that threaten to undermine the health of the banking industry, which has been straining under the weight of loans worth Rs 1,94,000 crore that have gone sour.
And the forecast isn’t pretty.
In its financial stability report (FSR) presented today, the RBI said average gross bad-loan ratio could surge to 4.6 per cent of total lending by September 2014 in a baseline scenario, far worse than the 4.2 per cent as of September 30 this year. The banking system’s gross non-performing assets stood at nearly 3.4 per cent at the end of March this year.
This growth in gross bad loans (amount of loans prior to provisioning) has also been accompanied by a sharp rise in cases of restructuring.
According to the RBI, the restructured standard advances also rose to 6 per cent of total advances at the end of September from 5.8 per cent in March. Thus, the proportion of stressed assets to total advances has risen to nearly 10.2 per cent in September from 9.2 per cent of March. It is estimated that bad loans for listed banks rose to over Rs 2 trillion at the end of September.
Bad loans have plagued the industry this fiscal as well, with the ratio rising from 3.4 per cent in March, badly crimping profitability in the banking industry. This is because rising bad loans entail higher provisions.
The NPAs have been rising at a time the economy has slowed to a crawling pace with clearances for major infrastructure projects badly delayed.
As expected, the public sector banks continue to have higher stressed advances at 12.3 per cent of total advances, of which restructured standard advances were around 7.4 per cent. Five sectors — infrastructure, iron & steel, textiles, aviation and mining — have a high level of stressed advances. At system level, these five sectors together account for around 24 per cent of total advances of commercial banks and around 51 per cent of their total stressed advances.
Significantly, the RBI said risks to the banking sector had increased since the publication of the previous FSR in June this year. “All major risk dimensions captured in the banking stability indicator show increase in vulnerabilities in the banking sector,” it observed.
The report added that macro stress tests on credit risk suggest that if the adverse macroeconomic conditions persist, the credit quality of commercial banks could deteriorate further. However, under improved conditions, the present trend in credit quality may reverse in the second half of 2014-15.
The report also saw the central bank reiterating its concern over inflation. Although some moderation is expected in food inflation in the months ahead, the persistence of retail inflation remains a worry.
According to the report, high inflation also adversely affects purchasing power, consumption and inflation adjusted returns on assets. One possible consequence of this has been a fall in net financial assets of households as a percentage of GDP. Money saved in bank deposits as a percentage of GDP by households has also fallen from the highs of the mid-2000.
Further, a fall in savings has widened the saving-investment gap increasing the economy’s dependence on external capital.
The central bank predicts that the economy will expand 5 per cent in the 12 months through March 31, the same pace as the last fiscal year, which was the weakest in a decade.
Profitability of the nation’s lenders, as measured by return on equity, fell to 10.2 per cent as of Sept. 30, the lowest in at least five years, due to higher provisions for bad loans and the slowing pace of growth from loan income, the RBI report showed.