More bleeding balance sheets ahead for banks, says RBI
NPAs could increase to 8.5% of total advances under situations of ‘severe stress’
MUMBAI: Risks to the Indian banking sector has increased sharply in the last six months, and this could lead to gross nonperforming assets (NPAs) -loans that do not yield returns- to rise to 8.5% by March 2017, from 7.6% in March 2016, the Reserve Bank of India (RBI) said on Tuesday.
If macro scenarios deteriorate further, gross NPAs could further increase to 9.3% by March 2017 under a “severe stress” scenario, the central bank said in its Financial Stability Report, a bi-annual document that provides an assessment of the risks to India’s financial stability. Public sector banks are likely to continue to register the highest gross NPA (GNPA) ratio, the report added.
The GNPA ratio increased to 7.6% at the end of March 2016, from 5.1% at the end of September 2015. The top 100 borrowers accounted for nearly a fifth of these NPAs. Total stressed assets increased to about 11.5% of banks’ combined loan book.
While retail loans continued to witness least stress, metals and metal products accounted for the highest stressed advances ratio, followed by construction and textiles. Infrastructure showed improvement, with the ratio falling to 16.7% from 21.8%.
The business of commercial banks also slowed significantly during 2015-16, RBI said.
A prolonged period of policy paralysis and lack of various government clearances have stalled various large projects, affecting the financials of large Indian companies who had borrowed heavily to set up the projects. The global business environment post the Lehman Brothers crisis also hit trade and eroded companies’ ability to ser- Gross bad loans at banks (as a percentage of total advances) as of March 31, 2016 from 5.1% as of Sept 30, 2015 Estimated gross bad loans as of March 31, 2017
The top 100 borrowers of banks accounted for 19.3% of bad loans, a surge from just 2.9% in Sept 2015
The clean-up process initiated by RBI has resulted in the bad loan stock of banks rising to a record ~5.8 lakh cr as of March 31, 2016 Around 12 lenders out of 39 listed banks reported losses during the January March quarter, while profits of the rest declined sharply vice their debts.
Six month earlier, the central bank conducted the first asset quality review (AQR), flagging concerns over weak corporate balance sheets. Provisioning for the bad loans resulted in banks reporting huge losses during the January-March quarter. The review was conducted on 36 banks (including PSBs), which accounted for 93% of all banks’ gross advances or loans.
According to the latest report, public sector banks may also see their capital adequacy ratio drop to 10.3% by March 2017, down from 11.6% in March this year. Capital adequacy is an indicator of a bank’s financial strength expressed as a ratio of capital to risk-weighted assets.
RBI said such a projection is based on the assumption that there will be further NPA recognition Estimated gross bad loans under a “severe stress” situation (after the review).
Stressing on the ill-health of government banks, the report said PSBs continued to hold the highest level of stressed advances ratio at 14.5%, while private and foreign banks recorded stressed advances at 4.5% each. Stressed assets are a total of gross NPAs and restructured assets.
Net NPAs increased considerably for all banks to 4.6% as on March 2016 from 2.8% in September 2015. For PSBs, it jumped to 6.1% from 3.6%, while for private banks it grew marginally to 1.3% from 0.9%.
Additionally, both credit and deposit growth of all scheduled commercials banks declined in the six-month period to 8.8% and 8.1% in March 2016, from 9.4% and 9.9% in September 2015, respectively.