RBI’s Financial Stabililty Report: 13% capital loss if top 3 individual borrowers default

Proportion of ‘highly leveraged’ firms up at 15.3%.

By: ENS Economic Bureau | Mumbai | Published: December 24, 2015 2:33:29 am
RBI Governor Raghuram Rajan. (Source: PTI) RBI Governor Raghuram Rajan. (Source: PTI)

Reserve Bank of India Governor Raghuram Rajan has raised concern over the rising stressed assets of big business groups and their impact on the financial system.

The central bank has warned that default of the top two borrowers could result in capital losses of 9 per cent, while 13 per cent losses could occur in case the three top individual borrowers default. Capital losses under the assumed scenarios of default of the top most borrower could be around 5 per cent, it said.

“Corporate sector vulnerabilities and the impact of their weak balance sheets on the financial system need closer monitoring,” Rajan said in the Financial Stabililty Report (FSR) released on Wednesday. A significant increase in the gross non-performing assets ratios of large borrowers among public sector banks from 6.1 per cent in March 2015 to 8.1 per cent in September 2015, led to an increase in the NPA ratio of the system.

The RBI said weak assets of large borrowers rose in the six-month period. “Standard assets among large borrowers declined from 86.2 per cent of total gross advances as of March 2015 to 84.5 per cent as of September 2015. The share of NPAs of these borrowers in total NPAs of all banks increased sharply from 0.7 per cent in March 2015 to 3.1 per cent in September 2015,” the RBI said.

Credit to top 100 large borrowers (in terms of funded amount outstanding) constituted 27.6 per cent of the credit to all large borrowers and 17.8 per cent of the credit of all commercial banks.

The RBI’s survey of non-financial companies revealed that the proportion of companies in the sample with negative net worth (termed as ‘leveraged’ companies) increased over last three half years from 18.4 per cent in September 2014 to 19.4 per cent in September 2015. The proportion of ‘highly leveraged’ companies increased from 13.6 per cent to 15.3 per cent, while the share of debt of these companies in the total debt increased from 22.9 to 24.9 per cent

Macro-stress test for sectoral credit risk revealed that in a severe stress scenario, among the select seven sectors, engineering, which had the highest GNPA ratio at 8.5 per cent as of September 2015, could see their GNPA ratio moving up to 14.5 per cent by March 2017 followed by iron & steel (from 8.4 per cent to 11.5 per cent) and cement (from 6.4 per cent to 11.2 per cent)

Gross NPAs of banks as percentage of gross advances increased to 5.1 per cent from 4.6 per cent between March and September 2015. The restructured standard advances as percentage of gross advances declined to 6.2 per cent from 6.4 per cent, while the stressed advances ratio increased to 11.3 per cent from 11.1 per cent during the same period.

Public sector banks recorded the highest level of stressed assets at 14.1 per cent followed by private banks at 4.6 per cent and foreign banks at 3.4 per cent.

RBI Governor also said that 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.

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