The Reserve Bank of India (RBI) has in a report identified infrastructure as a sector that could wipe out entire profits of banks recorded in the financial year 2016-17, in the case of severe stress in servicing loans. Credit growth to the infrastructure sector has remained negative for the past 14 months in a row — from April 2016. This is due to a combination of factors including overall slack in credit disbursement to industry, banks’ reluctance to fund risky long-gestation infrastructure projects and existing loans having turned into non-performing assets (NPAs).
In the Financial Stability Report for January-June period, the RBI examined the credit risk arising from exposure to the infrastructure sectors — especially power, transport and telecommunications — through a sectoral credit stress test. The central bank assumed the gross NPA ratio of the sector to increase by a fixed percentage point in order to ascertain the likely impact on the banking sector’s profitability. “The results showed that shocks to the infrastructure segment will considerably impact the profitability of banks,” according to the report. The most severe shock — of 15 per cent of restructured standard advances and 10 per cent of standard advances become NPAs — will completely wipe out the recorded profits of the banks for the financial year 2016-17, it said.
The most significant impact of a severe shock will in the case of power and transport sectors, the RBI said. In May, credit to power sector, which accounts for over 50 per cent of the infrastructure sector credit, recorded contraction of 3.6 per cent. Similarly, credit to road sector was down 5.7 per cent in May. Banks’ outstanding credit to overall infrastructure sector was down by 4 per cent to Rs 8.89 lakh crore as on May 26, 2017, from Rs 9.27 lakh crore as on May 27, 2016. The profitability of the public sector banks (PSBs) dipped sharply in past couple of years due to high provisions they had to make for bad loans. PSBs recorded a combined net profit of Rs 474 crore in 2016-17, compared with net losses of Rs 20,003 crore in 2015-16, according to data from stock exchanges and the finance ministry. Any further stress in their infrastructure loan portfolio could further dent their profitability.
While the RBI has termed 10 per cent of standard advances turning into NPAs as a severe shock for the banking sector, the overall gross NPA of banks has already risen to 9.6 per cent in March 2017, from 9.2 per cent in September 2016. The stressed advances ratio for the industry has risen to 23 per cent from 22.3 per cent during the same period, the RBI data showed. The overall stressed advances ratio declined marginally from 12.3 per cent to 12 per cent due to fall in restructured standard advances, especially in agriculture, services and retail sectors. Large borrowers continued to account for a major chunk of 86.5 of the total bad loans, said the RBI report.
For resolution of bad loans, the RBI last month directed banks to refer 12 troubled companies with a combined debt of around Rs 2.5 lakh crore for corporate insolvency resolution under the Insolvency and Bankruptcy Code 2016 (IBC). Other than these 12 cases, the RBI suggested banks should be required to file for insolvency proceedings under the IBC for non-performing accounts in case they are unable to agree upon a viable resolution plan within six months.