NON-PERFORMING ASSETS OF BANKS COULD RISE TO 7% BY MARCH 2015, SAYS RBI
THE Reserve Bank of India (RBI) on Monday said gross non-performing assets (NPAs) of banks could rise to 4.6% of total loans by September 2014, from 4.2% as of September, 2013, even if macroeconomic conditions improve from here on. Bad loans can rise to 7% by March 2015 if conditions worsen, RBI said in its Financial Stability Report . The central bank said banks are more vulnerable to contagion risks now as their interconnectedness has increased.
Further, banks' capital adequacy ratios can also dip in stress scenarios, it feels. Public sector banks have the bulk of the NPAs of the system and, therefore, their capital adequacy could slip to 9.6% by March 2015 from the current 11.2%, it said.
The risks to the stability of Indian banks have increased since June and the credit quality of banks would deteriorate further in the months to come if outlook on growth does not improve, according to the RBI.
When stress scenarios such as a rise in interest rates are applied, banks' balance sheets could be damaged considerably, the report noted.
“The analysis shows that the total loss to the banking system after taking in to account contagion losses could significantly exceed losses due to the direct impact of the stressed conditions alone,” the report said. The rising stock of bad loans, weakening stability indicators of the corporate sector, along with adverse macroeconomic condi- tions, have increased risks to the banking sector.
The construction sector, followed by iron and steel, will contribute the maximum to NPAs by 2015, the RBI said. The report analysed several stress scenarios by applying credit shocks, interest rate shocks and liquidity stress.
The impact of credit shocks are more pronounced while that of interest rates was less. Liquidity risks could be managed due to the mandated Cash Reserve Ratio and Statutory Liquidity Ratio.
One of the stress scenarios applied was an increase of NPAs by 100% wherein the total capital loss for banks would be a whopping 40.1%.
If 30% of restructured assets become bad, banks take a hit of 2.9% on their capital, the stress test showed.
Bankers and even the RBI have estimated that currently around 20% of restructured assets turn into NPAs. As of June end, banks had restructured about R3.25 lakh crore worth of loans, according to an earlier RBI estimate.
Several shock scenarios such as rise in interest rates across tenures by up to 250 basis points were also applied and the tests showed that trading books could take a hit of 0.6% of total capital while the balance sheet could get hit by 4% if the yield curve steepens.
Another key risk that the RBI flagged was of credit concentration wherein the central bank stressed that current group and single borrower exposure norms are high and need to be reviewed to enhance stability.
At present, a bank can lend 25% of its capital funds to a single-borrower company and up to 40% to a group. The group borrower limit is further enhanced to 55% in case of infrastructure.
“This limit has the potential to allow the default of one particular consolidated borrower to cause a serious loss of capital in a banking company,” the RBI report said, citing an earlier report by the IMF.
Through a separate survey, the RBI pointed out that stability indicators of the corporate sector have also worsened.
Barring profitability, corporate stability indicators such as leverage, liquidity, sustainability and turnover worsened during the October-March period of 2012-13.
Total stressed assets of banks that include gross nonperforming assets and restructured loans rose to 10.2% of total loans by September end from 9.2% in March.
Among the bank-groups, the public sector banks continue to have distinctly higher stressed advances at 12.3% of total advances, of which restructured standard advances were around 7.4%.