MUMBAI: The Reserve Bank of India (RBI) has once again flagged concerns over the weakening corporate performance and debt servicing capabilities of businesses on banks’ balance sheets.
State-run banks are the worst-affected with gross NPAs of large borrowers significantly rising to 8.1 per cent in September, 2015 from 6.1 per cent in March, 2015, while 10.4 per cent of the total bank loans are under threat.
The report's stress test results also revealed that gross NPA ratio may rise to 5.4 per cent by September, 2016 from 5.1 per cent in September, 2015. However, it could subsequently improve to 5.2 per cent by March 2017.
“Corporate sector vulnerabilities and the impact of their weak balance sheets on the financial system need closer monitoring,” said Raghuram Rajan, Governor, RBI in his foreword in the Financial Stability Report released on Wednesday.
The report underscored the sharp increase in the share of large borrowers to the total gross NPAs to 87.4 per cent in September, 2015 from 78.2 per cent in March, 2015 is a major concern to lending institutions and other stakeholders.
“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 form the observations in this context could be that banks extended disproportionately high levels of credit to corporate entities/promoters, who had much less ‘skin in the game’ during the boom period,” it noted adding that the capital expenditure, which rose sharply, fell despite rising debt. This is due to falling profitability of corporates and consequently the debt servicing capabilities. Capex in FY15 was at a 5-year-low of `2.76 lakh crore.
This is not the first time that Rajan had flagged concerns over high debt leverage of corporates. Earlier, he said large willful defaulters should be recognised as freeloaders and shouldn’t be ‘lionised’ as industry captains.
Meanwhile, gross NPAs of banks as a percentage of gross advances rose to 5.1 per cent from 4.6 per cent between March and September, 2015. The stressed advances ratio too increased to 11.3 per cent from 11.1 per cent in the same period.
“The banking stability indicator shows that the risks to the banking sector increased since the publication of the previous FSR. The factors contributing towards increase in risk during the current half-year are deteriorating asset quality, lower soundness and sluggish profitability,” the report said.
However, the restructured standard advances as a percentage of gross advances declined to 6.2 per cent from 6.4 per cent in the March-September period.
FSR Cautions on Global Headwinds
Mumbai: RBI Governor Raghuram Rajan said domestic policies need to be carefully calibrated to withstand global headwinds due to China's slowdown and the US rate hike, even though India remains "relatively better placed" to handle volatilities. "The recent Fed Fund rate hike and the developments in China call for a careful calibration of domestic policies to withstand global headwinds," Rajan said in the FSR report. In his first comments following his US counterpart Janet Yellen's decision to hike rate by 0.25 to 0.50 per cent, Rajan said though “we appear to be relatively better placed there are challenges, including a possible spike in inflation we need to stand guard against.”