Financial stability report in 5 points: NPAs seen worsening, India Inc in better shape

The Reserve Bank of India on Tuesday released its the Financial Stability Report (FSR). The report reflects the overall assessment on the stability of India’s financial system and its resilience to risks emanating from global and domestic factors, the central bank said. It also discusses issues relating to development and regulation of the sector. Here are the key points in the report: 1) NPAs set to worsen: The central bank foresees bad loans of the banking sector worsening. It sees the gross non-performing assets of the banks rising to as high as 9.3 percent in 2016-17 after hitting 7.6 percent in March 2016. In comparison, banks’ gross NPAs had stood at 5.1 percent in September 2015. [caption id=“attachment_2861920” align=“alignleft” width=“380”] Reuters[/caption]The report said macro stress tests suggest that under the baseline scenario, the GNPA ratio of banks may rise to 8.5 per cent by March 2017 from 7.6 per cent in March this year. “If the macro scenarios deteriorate in the future, the GNPA ratio may further increase to 9.3 per cent by March 2017 under at severe stress scenario,” the report said. The RBI said among the 36 banks on which it conducted an asset quality review, public sector banks may continue to register highest GNPA ratio. Under the baseline scenario, PSBs GNPA ratio may go up to 10.1 percent by March from 9.6 percent as of March 2016. However, under a severe stress scenario, it may increase to 11 percent by March 2017. The GNPA ratio of private sector banks, under the baseline scenario, may rise to 3.1 percent by March 2017 from 2.7 percent as of March 2016, which could further increase to 4.2 percent under a severe stress scenario. 2) India stands out among peers: Indian economy stands out in terms of growth among its peers, despite global uncertainties, banking sector issues. The country’s Indian financial system remains stable. “Being a net commodity importer and with efforts to improve the ’ease of doing business’, India at this juncture stands out amongst the emerging markets cohort in terms of growth,” the report has said. However, it stressed on the need to bolster the gross fixed capital formation (or investment) while maintaining robust trends in consumption to sustain higher levels of growth. 3) Be alert about oil price risk: It also reminded that India needs “to be alert to the risks of commodity price cycle reversals and the economy’s preparedness to readjust.” Already oil prices have significantly moved up in the recent period since their February lows of below $30 a dollar. The recent slide in crude oil prices has helped the country make its external position robust with forex reserves at historic highs ($363.83 billion) and low trade deficit. The FSR also has caution about the downside of prolonged low oil prices. This may result in reduction in private transfers and remittances. “Hence, there may not be any room for complacency in the current global scenario,” the report added. 4) Corporate sector risks moderated: Indian companies’ leverage situation has improved in 2015-16 and the overall risks in the corporate sector have also moderated during the year. “The proportion of ’leveraged’ companies declined sharply from 19 percent in March 2015 to 14 percent in March 2016,” the report said. Going by the share in total debt as well, their share came down to 20.6 percent from 33.8 percent, it said. A leveraged company is one which has negative net-worth or a debt to equity ratio exceeding 2 and the RBI has considered the listed non-government and non-financial companies in its analysis. The proportion of debt of highly leveraged companies (those from the leveraged lot having a debt-to-equity ratio of over 3) came down to 19 percent from 23 percent, it said. Though the overall risks are are moderating in the corporate sector, the risks on account of low demand and liquidity pressures continue, the report has pointed out. 5) Housing NPA just 1.3%: Rise in home prices “moderated significantly” in 2015-16 and there is no threat of any systemic risk from the housing sector with the gross NPAs among retail loans being contained. “With gross non-performing asset (GNPA) ratio around 1.3 percent, the retail housing segment does not presently pose any significant systemic risk in the Indian context,” the report has said. Compared with the overall GNPA ratio of 7.6 percent for the entire banking system as of March, the stress in the retail loans is very low, which also explains banks’ eagerness to tap into this segment, it said. The country’s real estate sector is going through a painful demand slowdown, with 2.26 lakh unsold houses only in the Mumbai Metropolitan Region by end of fiscal 2015-16. With PTI inputs