Banks to feel the heat of bad loans for some more time, cautions RBI report

The deterioration in the asset quality of scheduled commercial banks may continue for a few more quarters, a report by the Reserve Bank of India’s financial stability unit has warned.

Stressed advances are continuing to show a rising trend and though risks to the banking sector have moderated marginally in the second half of 2014-15, concerns remain over the continued weakness in asset quality and profitability, says the half-yearly Financial Stability Report released by the RBI on Thursday.

Just two sectors — power generation and iron and steel — account for over a quarter of the stressed loans though together they account for just 12.8 per cent of total advances.

The report, based on macro stress tests of 148 scheduled commercial banks as of March 2015, cautions that further shocks to the infrastructure sector would significantly affect the banking system.

Falling profit margins and decreasing debt repayment capabilities of the corporate sector add to the concern, although the overall leverage level in the Indian economy is comfortable compared with other countries.

The gross non-performing assets (GNPA) ratio of commercial banks, which was 4.6 per cent in March 2015, could deteriorate to 4.8 per cent by September 2015 in the baseline (least stress) scenario and improve to 4.7 per cent by March 2016. However, if the macroeconomic conditions deteriorate, then the GNPA ratio could rise to 5.9 per cent by March 2016, the Report warns.

Restructured standard advances (RSAs) during the six-month period from September-end 2014 to March-end 2015 also increased, pushing up banks’ stressed advances (GNPAs plus RSAs) to 11.1 per cent of total advances from 10.7 per cent.

Public sector banks recorded the highest level of stressed advances at 13.5 per cent of total advances as of March 2015 compared with 4.6 per cent in the case of private sector banks.

The report observed that public sector banks may have to bolster their provisions for credit risks from the present levels to meet the ‘expected losses’ if the macroeconomic environment deteriorates further under assumed stress scenarios. Expected losses is the average credit loss that the banking system expects from its credit exposure.

Power sector caution The report said the debt servicing ability of power-generation companies in the near term may continue to remain weak given the high leverage and weak cash flows. Banks, therefore, need to exercise adequate caution while dealing with the power sector and need to continue monitoring developments very closely.

This observation comes despite the government improving potential domestic supply through the auction of coal blocks and fixing the gas price to improve power generation.

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