RBI: Economy may clock 7.4% growth; bad loans likely to rise
MOUNTING BURDEN RBI warns of deterioration in NPAs due to prevailing economic conditions
MUMBAI: The Reserve Bank of India (RBI) said on Wednesday that banks will witness further deterioration in their non-performing assets (NPAs) or bad loans due to the “economic situation prevailing” in the current fiscal.
According to RBI’s Annual Report 2017-18, gross non-performing assets (GNPAs) plus restructured standard advances in the banking system remained elevated at 12.1% of gross advances at the end of March 2018.
The combined impact of the increase in provisioning against NPAs and mark-to-market (MTM) treasury losses on account of the hardening of yields eroded the profitability of banks, resulting in net losses, it said.
In a pre-emptive response, it said, the RBI allowed banks to spread their MTM losses over four quarters starting from third quarter.
“Going forward, the stress tests carried out by the Reserve Bank suggest that under the baseline assumption of the current economic situation prevailing, the GNPA ratio of scheduled commercial banks (SCBs) may increase further in 2018-19,” it said.
The aggregate gross NPAs of SCBs increased primarily as a result of this transparent recognition of stressed assets as NPAs, from ₹3,23,464 crore, as on March 31, 2015, to ₹10,35,528 crore, as on March 31, 2018.
In order to curb NPAs, the RBI has put in place revised and harmonised guidelines for resolution of stressed assets during the year, replacing earlier schemes like Sustainable Structuring of Stressed Assets (S4A scheme), Strategic Debt Restructuring scheme (SDR), Corporate Debt Restructuring (CDR) scheme and Joint Lenders’ Forum (JLF).
On GDP front, the RBI expects economic growth rate to accelerate to 7.4% in the current financial year owing to a pickup in industrial activity and good monsoon. In its annual report released on Wednesday, the RBI also said its monetary policy will continue to be guided by the objective of achieving the medium-term target for retail inflation of 4%, within a tolerance band of +/- 2 per cent, while supporting growth.
It cautioned that India’s external sector will have to confront global headwinds, but expressed confidence that the current account deficit would largely be financed by foreign direct investment. Several experts, including India’s largest lender State Bank of India, expects the CAD to widen this fiscal on account of high oil prices and a large trade deficit. The CAD was estimated at 2% of the GDP in the financial year ending March 2018.
The report noted that agricultural production is likely to remain strong, growth impulses in industry are strengthening — propelled by a sustained pickup in manufacturing and mining activity, corporates are reporting robust sales growth and an improvement in profitability, and services sector activity is set to gather pace.
Also, revenue-earning freight traffic of railways has picked up, driven by stepped-up movement in coal, fertiliser and cement.
“Keeping in view the evolving economic conditions, real GDP growth for 2018-19 is expected to increase to 7.4% from 6.7% in the previous year, with risks evenly balanced,” said the RBI report.
The report has maintained the projection regarding GDP growth for the current fiscal as estimated in the third bi-monthly monetary policy of 2018-19 announced earlier this month.
The RBI report also said the transfer of surplus to the government rose by 63.08% to ₹50,000 crore during the financial year ending June 30, 2018. It had transferred a surplus of ₹30,659 crore to the government in financial year 2016-17.
The central bank transfers the surplus generated from its functions to the government at the end of each financial year, after accounting for any funds transferred to the contingency reserve or the asset development fund. It follows July-June financial year.
The central bank also pointed out that India remains a preferred destination for foreign direct investment (FDI) as domestic consumption remains strong.
With manufacturing sector gathering momentum, helped by both services and agriculture sectors, consumption demand remains robust in the country making it an attractive investment destination, the annual report said.
India received $37.3 billion capital inflow in 2017-18 as compared to $36.3 billion in the previous fiscal. During the 2015-16, the country received $36.06 billion.
Giving details of FDI flow, the report said, the increase in foreign capital flow was mainly due to higher flows into the communication services, retail and wholesale trade, financial services and computer services.