Banks struggle with bad loans will worsen if economy falters further, warns RBI

Risks to India’s banking system continue to remain at elevated levels on concerns of further deterioration in the asset quality, the Reserve Bank of India (RBI) said in its Financial Stability Report (FSR) released on Monday. Even though the liquidity scenario in the banking system has improved during March-September, risks arising out of deterioration in asset quality and soundness of banks remain, the central bank said. “Risks to the banking sector have not changed much since the publication of the previous FSR,” the RBI said. The central bank releases FSB once in every six months taking stock of the overall functioning of the financial system through a series of stress tests conducted among banks. The last such report was released in June, 2014. [caption id=“attachment_2020961” align=“alignleft” width=“300”]  If the economy improves, the gross NPAs of the banks will improve to 4 percent by March 2016. Reuters[/caption] The stress tests showed that the overall gross non-performing assets (GNPAs) of all scheduled commercial banks will decline to 4 percent by March 2016 from 4.5 percent as of end September 2014 if the economy improves. But, if the recovery fails to materialize and the current conditions worsen, the GNPA level can worsen to 6.3 percent during the same period, the central bank said, adding that this could erode the capital adequacy of banks. “Under such a severe stress scenario, the system level CRAR (capital to risk weighted asset ratio) of SCBs (scheduled commercial banks) could decline to 9.8 percent by March 2016 from 12.8 percent in September 2014,” the RBI said in the report. Under current norms, banks need to set aside money in the form of provisions to cover bad and restructured loans. For a loan that has gone fully bad, the provisions can go up to 100 percent depending upon the state of the asset. For a fresh restructured loan, the provisioning is 5 percent as against 0.4 percent for a standard loan. Going by the stressed assets, under a severe stress scenario, among various sectors, the engineering sector is expected to register the highest GNPA ratio at 12.0 percent by March 2016 followed by the cement sector (10.6 percent), the RBI said. Until September, Indian banks have about Rs 2.7 lakh crore worth of GNPAs, while the total restructured loans under the corporate debt restructuring channel alone stands about Rs 2.6 lakh crore. That apart, banks also conduct bilateral recasts. As on September, the infrastructure sector contributed the highest to the CDR list with total loan amount of Rs 52,982 crore, followed by iron and steel (Rs 42,655 crore) and power (Rs 31,036 crore). As Firstpost had noted earlier , delay in economic recovery has already begun to reflect on the balance sheets of banks as companies are unable to recover even after banks offered loan recasts facility. In the September quarter, number of failed cases, which were taken out of CDR stood at 14 with the total loan amount to the tune of Rs 8,356 crore, while the number of cases exited successfully were nil. Similarly, in the June quarter, the number of failed cases stood at 9 with loans worth Rs 8,706 crore. Again, the number of successful cases was nil. In short, despite the loan restructuring facility provided by banks to troubled companies, not a single company has managed to successfully exit from the CDR mechanism in the last six months. On the contrary, the bad loan pile has only grown bigger. This is evidently a bad trend and signals what is in store in the future unless recovery takes place.