Corporate sector vulnerabilities and the impact of companies’ weak balance-sheets on the financial system need close monitoring, cautions the Reserve Bank of India’s latest Financial Stability Report.

In the corporate sector, the level of profitability, leverage and debt servicing capacity continue to cause concern with their attendant adverse impact on the industrial sector, it added.

This observation comes notwithstanding some improvement in corporate performance during the first half of the financial year.

The report cautioned that companies with lower debt-servicing capacity and high leverage may put pressure on the already deteriorating asset quality of bank loans in adverse situations.

It observed that the banking stability indicator shows that risks to the banking sector have increased since the publication of the previous report (in June), mainly on account of deteriorating asset quality, lower soundness and sluggish profitability. Gross non-performing assets of scheduled commercial banks (SCBs) as a percentage of gross advances increased to 5.1 per cent from 4.6 per cent between March and September 2015.

Public sector banks recorded the highest level of stressed assets at 14.1 per cent followed by private sector banks at 4.6 per cent and foreign banks at 3.4 per cent.

While adverse economic conditions and other factors related to certain specific sectors played a key role in asset quality deterioration, one of the possible inferences could be that banks extended disproportionately high levels of credit to corporate entities/promoters who had much little or no ‘skin in the game’ during the boom period.

A significant increase in the GNPA ratios of large borrowers among PSBs from 6.1 per cent in March to 8.1 per cent in September led to an increase in the GNPA ratio of the banking system.

The pressure on asset quality continues to be the biggest impediment in improving the performance of banks, especially PSBs, which needs to be tackled head-on to ensure that bank credit growth is not allowed to settle at a level lower than what is considered optimum, the RBI said.

The RBI said while the fresh policy measures with respect to some of the stressed sectors are expected to help ease the pressure to some extent, the results may take time to manifest themselves fully. Apart from additional capital requirements on account of regulatory prescriptions (with the phasing in of Basel III capital requirements), banks need further capital cushion to tide over the current situation due to the impact of asset quality stress.

Reduced provisioning The RBI cautioned that as banks face constraints in raising capital in an environment of slowing credit growth, there may be an increased tendency to reduce the provisioning levels, to protect the profitability.

Related Topics
comment COMMENT NOW