The Financial Express - - FRONT PAGE - fe Bureau

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%.

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