The Financial Stability Report released by the Reserve Bank of India (RBI), while indicating two positive trends also wans of increased stress in the system, says a research report.
In the note, Religare Capital Markets Ltd says, over the past six months there are two positive trends, including improvement in corporate credit health with exposure to levered players reducing to 14% in March 2016 compared with 19% in September 2015. In addition, there is a meaningful decline in stressed advances ratio for the infrastructure sector to 17% from 22%.
"On the other hand, the FSR warns of increased stress in the system with a special mention accounts (SMA)-1 exposure rising 35%, sectoral stress tests revealing a severe hit on bank profits and system gross non-performing assets (GNPAs) likely rising to 8.5% by March 2017 even amid a stable macro," the report says.
According the FSR, proportion of levered companies is declined to 14% in March 2016 from 19.4% in September 2015. As per RBI’s analysis of around 1,800–2,600 non-government non-financial (NGNF) listed companies under FSR, the proportion of levered companies declined, and even their share in total debt fell to 21% from 30% during this period. The report however did not cite any reasons for the sharp improvement in corporate credit health over the last six months.
As per the report, stressed levels in infrastructure sector too declined to 17% during the same period. While the GNPA ratio for the industrial sector worsened to 11.9% in March 2016 from 7.3% in September 2015, its stressed advances ratio declined marginally to 19.4% from 19.9% during this period. Within the sector, stress levels increased in sub-sectors such as metals (to 34%), construction (27%) and textiles (21%), but declined in the infrastructure sector to 17% from 22% in September 2015.
While there is a sharp decline in advances to SMA-2 accounts, SMA-1 advances jumped 35% during September 2015 to March 2016 period. Advances to large borrowers classified as SMA-2 declined sharply by 40%, and restructured standard advances slipped by 25% between September 2015 and March 2016. Simultaneously, GNPAs for these borrowers spiralled up 66.3%, largely reflecting reclassification during this period. However, advances to large borrowers classified as SMA-1, that shows early signs of asset quality stress, increased sharply by 35.1% in the last six months, Religare pointed out.
According to Religare report, the sectoral credit stress tests carried out by RBI indicate a hit on bank profits. The RBI assessed the credit risk arising from exposure to the infrastructure sector by conducting sectoral credit stress tests. "The tests revealed that on converting a portion of existing restructured standard advances in the infrastructure sector into NPAs and exposing other standard advances in each sector to shocks, the hit on profitability of banks would be severe. The tests further revealed that the most significant effect of the single sector shock would come from the power and transport sectors," the research note added.
The Financial Stability Report -FSR from RBI also expects system GNPAs to touch 8.5% by March 2017. The RBI’s macro stress tests suggest that under the base case, the GNPA ratio in the system and public sector banks (PSBs) may rise to 8.5% and 10.1%, respectively, by March 2017 from 7.6% and 9.6% in March 2016. "However, under a severe stress scenario, the ratio may jump to 9.3% and 11.0% by March 2017. Private banks may fare better with their GNPA ratios rising to 3.1% and 4.2% by March 2017 under base and severe stress scenarios," Religare concluded.
“Assessment
India’s financial system remains stable, even though the banking sector is facing significant challenges. As global uncertainties and transiting geopolitical risks impact India, continuation of sound domestic policies and structural reforms remain the key for macroeconomic stability.â€
The recent timely initiative by RBI to save the assets of the banking sector from getting totally impaired by assault by corporate borrowers who turned out to be wilful defaulters has started showing results. Banks, in the past did not experience the pain from stressed assets, as they were able to create provisions from the wide margins they enjoyed. With global changes in interest rates regime, such margins will not be available now. But all is not lost. Awareness about the need for professionalism has dawned at the right time. Now what is required is freedom for regulators and banks to manage their affairs professionally.