The Reserve Bank of India (RBI) has flagged off its growing concern over the deterioriation in asset quality of banks, with public sector banks (PSBs) showing particularly obvious signs of stress on this account. The results of the listed banks in the first quarter of FY13 also corroborate this view, and analysts say the stress levels are likely to continue and there is no relief in sight.
In its annual report for 2011-12 released Thursday evening, RBI has pointedly said that the decline in asset quality has “emerged as a concern within and outside the Reserve Bank during 2011-12.” India, the central bank says, was not an exception to the general trend of an economic downturn impacting the quality of assets.
“Asset quality deterioration during 2011-12 was particularly signiﬁcant in the case of public sector banks. The gross Nonperforming Assets (NPAs) of the public sector banks increased to 3.2 per cent of gross advances at the end of 2011-12 from 2.3 per cent at the end of 2010-11. In net terms, their ratio went up to 1.5 percent from 1.0 per cent over the same period.”
The central bank says while the NPA levels are still low by historical trends or cross-country comparison, the restructured standard advances in the PSBs increased to 5.7 percent of gross advances by at the end of 2011-12 from 4.2 percent a year ago.
Pointing to the slippage ratio increasing and recovery slowing down, RBI says this reflected
the stress arising in sectors like aviation and power, which are beset with deep problems. The overall deterioration in macro conditions put added pressures on asset quality. While some of these changes reﬂect the NPA cycle that generally tracks economic cycle, the sector-specific issues that include management and industrial relation issues need to be resolved, RBI says.
There has also been a signiﬁcant rise in restructuring of loans during the year. Several firms opted for corporate debt restructuring. Restructuring increased substantially during Q4 of 2011-12, taking the restructured loans at the end of 2011-12 to about 5 percent of the loan book of the scheduled commercial banks (SCBs), up from 3.9 percent a year ago. Aviation, state electricity boards (SEBs), textiles, telecom, shipping, power and steel were amongst the sectors that reported stress contributing to the restructuring, according to RBI.
However, in what can be seen as somewhat of a relief, the central bank does stress that the increasing NPAs and loan recasts are not systemic issues. While some strength of the banks’ balance sheets may have eroded, these, the central bank notes, have been in line with the movement in business cycles that have occurred earlier.
“The balance sheets are far from becoming fragile. The CRAR of the SCBs at the end of 2011-12 was 14.1 per cent, way above the prescribed 9 per cent norms and only marginally less than the 14.2 a year ago. Core CRAR, however, increased to 10.3 per cent at the end of 2011-12 from 10.0 per cent in 2010-11.”
RBI top brass has been meeting the managements of the banks to understand the problems of stressed assets and urge them to address the problem for some time now. A series of stress tests carried out to study the impact of various adverse macro-financial shocks on the health of banks showed that the banking system remained resilient even under stress scenarios.
An assessment of the stability of the banking system conducted through a series of banking stability measures did indicate that distress dependencies amongst banks had increased in recent years but remained well below the levels observed during the global ﬁnancial crisis in 2008-09.
Keeping in view the increasing incidence of restructuring and for reviewing the guidelines in the light of experience gained, RBI had constituted a working group which recommended doing away with regulatory forbearance regarding asset classification, provisioning and capital adequacy on restructuring of loans and advances gradually over the two-year period.
It has recommended increasing the provisioning requirement on stock of restructured loans from existing 2 percent to 5 percent in a phased manner over the two-year period along with the 5 per cent provisioning requirements on all newly restructured loans.
It has also suggested increase in promoters’ contribution to at least 15 percent of the diminution in fair value of the restructured account or 2 percent of the restructured debt,whichever is higher.
Says RBI: “A principle of higher amount of promoters’ sacriﬁce in case of restructuring of large exposures under CDR mechanism may bring about an incentive-compatible mechanism for lending discipline.”
In a warning to banks, the RBI says while the deterioration in asset quality during 2011-12 has been partly due to cyclical downturn, inadequate credit writing standards as well as weak credit administration has also played a role. The banks need to upgrade their systems to prevent slippages and improve the post-sanction recovery process, the central bank says.
In a report analysing the first quarter results of banks, broking house Motilal Oswal says the results throw up a negative surprise on margins where all PSBs surprised negatively, despite benefit of CRR reduction and capital raising, due to higher stress on asset quality.
Among the key highlights for the results of PSBs, the broking house lists that margins fell quarter-on-quarter, led by sharp increase in cost of deposits and higher slippages. The report says there is no relief on asset quality with slippages remaining at an elevated level and no significant improvement on recoveries and up-gradation. This apart, moderation in business growth and a decline in current account savings account (CASA) ratio continues. While the quarter saw lower restructuring, the pipeline remains high.