People Outside the RBI Headquarters in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Stress In The Banking Sector Maybe Bottoming Out, Says RBI’s Financial Stability Report

Stress in the Indian banking sector remains high but it may be close to bottoming out, said the Reserve Bank of India's Financial Stability Report released on Thursday. Still, bad loans may rise a little further with gross non-performing assets expected to hit 11.1 percent of all loans by September 2018, the report added.

Indian banks saw a surge in the reported level of bad loans over the past two years after the regulator conducted an asset quality review and pushed banks to recognise stressed assets appropriately.

According to the report, banks’ gross non-performing advances ratio rose from 9.6 percent to 10.2 percent between March and September 2017. Gross NPAs rose 18.5 percent on a y-o-y basis in September 2017.

“Private sector banks registered a higher increase in gross NPAs of 40.8 percent as compared to their public sector counterparts (17.0 percent),” the report noted.

The clean-up of bad loans began in September 2015. While public sector banks recognised bad loans in the first year of the clean-up, private sector banks lagged and did a bulk of the recognition only in fiscal years 2016-17 and 2017-18.

More Bad Loans At Big Companies

A large proportion of the bad loans in this cycle are on account of large corporates. The FSR noted that the gross NPA ratio of large borrowers increased from 14.6 percent to 15.5 percent between March and September 2017. The gross NPA ratio in this category went up for both public and private banks.

The report also noted that credit concentration risk remains significant in the case of nine banks. Credit concentration risk refers to high exposure to a small set of borrowers, which can prove to be a risk should one of these borrowers run into trouble. That is exactly what has happened in the current cycle with large industrial houses facing financial difficulties and, in turn, leading to a surge in bad loans across the sector.

NPAs Bottoming Out

The Financial Stability Report noted that the clean up is now concluding but may not be completely done. Stress tests conducted by the RBI as part of its financial stability review showed that the gross NPs ratio may increase to 10.8 percent by March 2018 and further to 11.1 percent by September 2018.

“The stress in the banking sector, particularly the PSBs, while significant, appear to be bottoming out,” the report said.

Commenting on the capital position of Indian banks, the report said that six banks could see their capital adequacy ratios fall below the minimum regulatory level of 9 percent by September 2018.

However, if the macro conditions deteriorate, capital adequacy ratio of more banks in the stress test could go below the minimum regulatory requirements it said.

"The recent capitalisation plan announced by the government for PSBs is expected to significantly augment capital buffers of affected banks as also the credit growth," the report added.

The government has announced a Rs 2.11 lakh crore bank recapitalisation plan over two years. In addition, Indian banks have raised Rs 69,000 crore in equity this fiscal, helping ease some of the concerns of a shortage of capital.