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Indian banks are vulnerable to further decline in profits as they face slow credit growth and elevated non-performing assets, IMF has said, calling for “additional and more timely action” to deal with the problem of bad loans.
“Banking systems are vulnerable to further declines in growth or profits, particularly in countries at later stages of the credit cycle (such as India), where slowing credit growth and risks from elevated levels of non-performing loans are most acute,” said the International Monetary Fund’s Global Financial Stability report.
Gross NPAs of public sector banks have surged to 9.32 per cent (₹4.76-lakh crore) in 2015-16 from 5.43 per cent (₹2.67-lakh crore) of advances in 2014-15.
IMF said bank loan-loss reserves have fallen short of the expected loss on non-performing loans under the current debt-at-risk in India. It said the potential losses arising from adverse de-leveraging would require additional provisions for many banking systems and the pressure is more acute in India where loan-loss reserves are low relative to potential losses.
Recognition of NPAs
The IMF called for swift and transparent recognition of NPAs to ensure good health of the banking system.
“Some, such as India, are taking steps to reduce non-performing loans, but additional and more timely action is needed,” it said.
The Indian banking sector, particularly public sector banks, have seen a sharp rise in their NPAs in the last couple of years.
The Reserve Bank has already nudged lenders to set aside more funds for stressed loans and clean up their balance sheets by March 2017.
Insolvency framework
To deal with the bad loan problem, the IMF has suggested that corporate insolvency frameworks should be upgraded, including by facilitating out-of-court settlements and debt-for-equity swaps, with well-defined and transparent rules. Also, contingency plans to manage corporate distress should be put in place.
“This should include a timely, market-based restructuring framework that minimises moral hazard while providing for limited state support, if necessary,” the IMF said.
Where available, banks should draw on their capital reserves to cushion losses.
“But where these reserves are insufficient, policy-makers will have to balance necessary prudential tightening against the risk of being excessively pro-cyclical,” the IMF said.
Gross NPAs of public sector banks have surged to 9.32 per cent in 2015-16 from 5.43 per cent of advances in 2014-15
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