The Reserve Bank of India (RBI) has warned that the asset quality of scheduled commercial banks may worsen from the current level if the macroeconomic conditions deteriorate drastically. The central bank’s latest Financial Stability Report has also raised red flag on connected banks triggering a contagion and sought more disclosures and accountability in big-ticket corporate debt restructuring (CDR).
While stress tests suggest that the asset quality of banks may improve in the near future, if macroeconomic conditions deteriorate, the gross non-performing asset (GNPA) ratio may increase further and under a severe stress scenario could rise to around 6.3 per cent by March 2016. “Under such a severe stress scenario, the system level capital adequacy ratio of banks could decline to 9.8 per cent by March 2016 from 12.8 per cent in September 2014,” the RBI said. Banks are then likely to fall short in terms of having sufficient provisions to meet expected losses under adverse macroeconomic risk scenarios.
In another warning to the banking system, the RBI’s contagion analysis with top five most connected banks revealed that the banking system could potentially lose significant portion of its total tier-I capital under the joint solvency-liquidity condition in the event of a particular bank triggering a contagion.
“This underscores the importance of monitoring not merely the interconnectedness, but also the counter-parties and magnitude of exposure involved in the connection,” it said.
Gross NPAs of banks as a percentage of the total gross advances increased to 4.5 per cent in September 2014 from 4.1 per cent in March 2014. Stressed advances increased to 10.7 per cent of the total advances from 10 per cent between March and September 2014, the central bank said. Public sector banks continued to record the highest level of stressed advances at 12.9 per cent of their total advances in September, followed by their private peers at 4.4 per cent.
On debt revamp, the RBI said there is a need to review and strengthen the accountability mechanism in the entire process of reference, approval and implementation or exit under CDR. “Adequate disclosures on the eventual cost-benefit profile of approved CDR cases (for successful as well as failed cases) will help in forming policy and aid proper use of scarce resources,” the RBI said.
“With increased regulatory focus on segregating cases of wilful defaults and ensuring adequate equity participation of promoter(s) in the losses leading to defaults, there is a need for greater transparency in carrying out a net economic value impact assessment and audit of big ticket CDR cases,” it said.
‘6% inflation over next 12 months’
MUMBAI: The Reserve Bank of India (RBI) on Monday said consumer price inflation (CPI) is expected to hover around 6 per cent in the next one year and economic activity is likely to be muted in the third quarter.
While the substantial easing in CPI inflation to 4.4 per cent in November 2014 from 11.2 per cent a year earlier marks a significant improvement in the Indian macroeconomic environment, the RBI’s latest projection suggests that “consumer price inflation over the next 12 months may hover around 6 per cent if the international crude prices remain around the current levels and the monsoon next year turns out to be normal.”
“High and persistent inflation often gets entrenched into inflation expectations and leads to uncertainty over prices. High inflation can adversely impact investment and consumption decisions,” the RBI’s Financial Stability Report said.
In the previous monetary policy review on December 2, RBI Governor Raghuram Rajan had said “there is still some uncertainty about the evolution of base effects in inflation, the strength of the ongoing disinflationary impulses, the pace of change of the public’s inflationary expectations, as well as the success of the government’s efforts to hit deficit targets.”
He had then said a change in the monetary policy stance “at the current juncture is premature.”