Bad loans at banks will rise further this fiscal: RBI report

Gross NPA ratio of banks to rise to 12.2% by March 2019 if economic conditions stay the same

MUMBAI: Bad loans at Indian banks, especially those controlled by the government, will increase further in the year to March 31, placing additional strain on the already stressed financial system, a central bank study warned.

Gross non-performing asset ratio of banks will rise to 12.2% by March 2019 from 11.6% at the end of the previous fiscal if economic conditions remain the same, said the Reserve Bank of India financial stability report released on Tuesday.

RBI’S latest report said that weak profitability of banks is an additional concern as it prevents lenders from setting aside adequate money to cover potential losses on loans and makes them vulnerable to adverse shocks.

In a scenario of severe stress, this ratio may rise to as high as 13.3% by March, the report said. For public sector banks, this ratio may jump to 17.3% by March.

Rising bad loans will also lead to further erosion of capital buffers. The capital adequacy ratio of banks will drop to 12.8% by March 2019 from 13.5% at the end of the previous year. A severe shock could, however, bring down the capital adequacy ratio of as many as 20 banks, mostly state-run, below 9%, the report said. Analysing the effectiveness of the prompt corrective action (PCA), the stability report said that the gross NPA ratio of PSU banks under PCA will worsen to 22.3% by March with six banks likely to experience capital shortfall under the baseline scenario.

“The ongoing churning in the financial sector following the operational-risk related incidents, the prompt corrective action on under-capitalised banks to prevent further deterioration and gradually nurse them back to health, and the disintermediation underway from bank to non-bank finance are all inevitable given the circumstances but need to be monitored carefully,” Viral Acharya, deputy governor, RBI wrote in the foreword to the report. “At such a juncture, the government’s front-loaded recapitalisation programme for the beleaguered public sector banks (PSBS) should impart robustness to the financial sector as a whole; however, governance reforms and market capital-raising appear to have again taken the backseat at the PSBS.”

The 11 banks under PCA framework are IDBI Bank, UCO Bank, Central Bank of India, Bank of India, Indian Overseas Bank, Dena Bank, Oriental Bank of Commerce, Bank of Maharashtra, United Bank of India, Corporation Bank and Allahabad Bank.

The report also said that RBI’S

enforcement department, which was set up to monitor banks in case they violate rules, has taken action against 13 banks (including a payment bank and a small finance bank) and imposed an aggregate penalty of ₹96.4 crore between July 1, 2017 and May 31.