Defaults, frauds making banks wary of lending: RBI

The Reserve Bank of India has cautioned that sporadic credit default events and incidents of frauds are making banks more reluctant to lend.

This is starkly evident from the fact that in the first half (H1) of 2019-20 the total flow of resources to the commercial sector declined by 60 per cent on a year-on-year to ₹3,94,035 crore (₹9,93,312 crore in H1 of 2018-19).

In its Report on Trend and Progress of Banking India, the RBI highlighted that the weakening of growth impulses and subdued credit off-take are playing out, with sporadic credit default events and incidents of frauds exacerbating the reluctance to lend.

“...In turn, this waning of confidence is weighing on overall economic activity. This is worrisome as it is taking hold at a time when the recent improvements in asset quality and profitability of the banking sector are at a nascent stage and capital ratios of public sector banks (PSBs) are shored up due to recapitalisation by the government,” the report said.

Notwithstanding the enhanced resolutions through the Insolvency and Bankruptcy Code (IBC), the RBI said the overhang of non-performing assets (NPAs) remains. The health of the banking sector hinges on a turnaround in macroeconomic conditions, it added.

The central bank said the resolution process under the IBC was gaining traction, with an increase in total recoveries in the recent period, although there has been some increase in haircuts.

Sectoral stress

Against the backdrop of subdued profitability of corporates, their low interest coverage ratio and deleveraging coupled with risk aversion of banks, the report said lenders have been shifting their focus away from large industrial loans towards retail loans, as the NPA ratios of the latter have traditionally been low.

In this regard, the RBI cautioned: “This diversification strategy, while helpful as a risk mitigation tool, has its own limitations: the slowdown in consumption and overall economic growth may affect the demand for and the quality of retail loans.

“Moreover, household leverage and indebtedness need to be kept in focus in the context of overall financial stability.”

The RBI emphasised that the need of the hour is to kick-start industrial credit and use the impetus therefrom to regenerate a virtuous cycle of capex, investment and growth.

PSB recap

According to the report, the capacity of public sector banks to sustain credit growth in consonance with the financing requirements of the economy will warrant that capital is maintained well above the regulatory minimum, providing these banks confidence to assume risk and to lend.

“In this sense, recapitalisation would be a continuous process. On the other hand, raising resources through public issues or private placements has been constrained, partly due to volatile market conditions.

“Going forward, the financial health of PSBs should increasingly be assessed by their ability to access capital markets rather than looking at the government as a recapitaliser of the first and last resort,” the RBI said.

NBFC challenges

Referring to the default and rating downgrades of a non-banking financial company (NBFC) and a housing finance company (HFC), the RBI underscored that it is important to recognise that the challenges faced by some of the NBFCs were reflective of inherent fragilities rather than merely a liquidity crunch.

On the positive side, banks reported a significant improvement in gross non-performing assets to 9.1 per cent of gross advances as at September-end 2019 against 11.2 per cent as at March-end 2018.

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