The Reserve Bank of India has warned that frontloading of regulatory relaxations, before the structural reforms are fully set in and conclusive evidence on sustained improvement in cumulative default rates (CDRs) and loss given defaults (LGDs), is observed could be detrimental to the interests of the economy.
Gross non-performing assets (NPAs) of the banking system shot up to Rs 10,39,700 crore, or 11.2 per cent of total advances, during the fiscal ended March 2018 as against Rs 791,800 crore (9.3 per cent of advances) in the same period of last year, it said. According to the RBI’s ‘Report on Trends and Progress in Banking’, during 2017-18, the GNPA ratio reached 14.6 per cent for PSU banks due to restructured advances slipping into NPAs and better NPA recognition. “For private banks, it remained at a much lower level but rose during the year. The asset quality of FBs improved marginally. Supervisory data suggest that during the first half of 2018- 19, the resolution of some large NPA accounts resulted in an improvement in asset quality of banks,” the RBI said.
During the year, the share of doubtful advances in total gross NPAs increased sizeably, driven up by PSU banks. The share of sub-standard and loss assets in gross NPAs of private declined under the impact of aggressive write-offs. During H1 of 2018-19, the share of sub-standard and doubtful advances of banks declined, while that of loss assets increased marginally, the RBI said. “Supervisory returns suggest that on top of the elevated level of stressed assets, fresh slippages rose during 2017-18 in respect of PSU banks as against a decline in the previous year. This is largely attributable to restructured advances slipping into NPAs and a decline in standard advances,” the RBI report said.
The adequacy of buffers becomes an important issue in order to absorb the expected losses which have not been provided for, if and when they materialize. It also needs to be recognised that the Indian banking system has a high proportion of un-provided NPAs vis-à-vis the capital levels although after the IBC and the Reserve Bank’s revised framework for resolution of stressed assets, there are signs of improvement in the default rates and the recovery rates.
There have been calls for reducing the regulatory capital requirement from various quarters. “Against the foregoing however, the case for a recalibration of risk-weights or minimum capital requirements would need to be carefully assessed—frontloading of regulatory relaxations before the structural reforms fully set in and conclusive evidence on sustained improvement in CDRs and LGDs is observed—could be detrimental to the interests of the economy,” it said.