The Reserve Bank of India (RBI) has warned against a sharp rise in the non-performing assets (NPAs) of banks as “the banking stability indicator shows that the risks to the banking sector remained elevated due to continuous deterioration in asset quality, low profitability and liquidity”.
The stress test indicated that under the baseline scenario, the GNPA ratio may increase from 9.1 per cent in September 2016 to 9.8 per cent by March 2017 and further to 10.1 per cent by March 2018, it said. “If the macroeconomic conditions deteriorate, the GNPA ratio may increase further under such consequential stress scenarios,” the RBI said in its Financial Stability Report for December 2016.
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Among the bank groups, public sector banks may continue to register the highest GNPA ratio, it said. “Under baseline scenario, the PSBs’ GNPA ratio may increase to 12.5 per cent in March 2017 and then to 12.9 per cent in March 2018 from 11.8 per cent in September 2016, which could increase further under a severe stress scenario,” the report said.
The business growth of banks remained subdued with PSBs continuing to lag behind their private sector peers. System level profit after tax (PAT) contracted on y-o-y basis in the first half of FY17, the RBI said. “The asset quality of banks deteriorated further between March and September 2016. PSBs continued to record the lowest capital to risk-weighted assets ratio among the bank groups with negative returns on their assets,” the FSR said.
According to the FSR, the macro stress test shows that GNPA ratio of banks may increase further under assumed baseline macro scenarios. “The PSBs may record the highest GNPA ratio and lowest capital to risk-weighted asset ratio (CRAR) among bank-groups although the CRAR at the system as well as bank-group levels is expected to remain above the regulatory required minimum,” it said.
Asset quality of scheduled urban co-operative banks (UCBs) deteriorated, the RBI said. “Asset quality of the non-banking financial companies (NBFCs) also worsened. The degree of interconnectedness in the banking system measured by the connectivity ratio showed a declining trend. Banks were the dominant players accounting for nearly 59 per cent of the total bilateral exposures followed by NBFCs.
On a net basis, asset management companies managing mutual funds (AMC-MFs) followed by the insurance companies were the biggest fund providers in the system while NBFCs followed by banks were the biggest receivers of funds,” the RBI said.
With the implementation of global regulatory reforms most of the major international banks have become more resilient in terms of capital and liquidity, the RBI said. “However, risks of divergence from the demanding global standards amidst discriminatory treatment of foreign financial institutions seem to have increased. Globally, some risks inherent in banks may be getting transferred to other segments of the financial markets due to increased regulatory scrutiny and elevated capital requirements for banks,” it said.