The Reserve Bank of India (RBI) on Thursday warned against the rising bad loans and the ability of overleveraged corporate sector to service its debt.
“While leverage has increased, the ability to repay debt (solvency ratio) and debt servicing ability (interest coverage ratio) of the corporates has declined,” the RBI’s Financial Stability Report (FSR) has said. Beside its adverse impact on banks’ balance sheets, high leverage of corporates may hinder the transmission of monetary policy impulses — passage of rate cuts — as corporates may not be in a position to benefit from falling interest rates due to high levels of debt, it said.
The RBI also indicated the probability of slippage of Rs 53,000 crore loans to the power distribution companies (Discoms) into non-performing assets loans in view of the implementation of new regulatory norms on loan restructuring effective April 1, 2015.
Banks have restructured around Rs 53,000 crore of the seven Discoms’ exposure. The moratorium period for repayment of the principal amounting to Rs 43,000 crore ended by March-2015. The debt servicing ability of power generation companies in the near-term may continue to remain weak given the high leverage and weak cash flows, the RBI said. “Banks need to exercise adequate caution while dealing with the sector and need to continue monitoring the developments very closely,” it said.
“The continued stress on asset quality of public sector banks and consequent pressure on capital adequacy is a matter of increasing concern,” RBI Governor Raghuram Rajan said in the report.
While there has been a “significant improvement in the macroeconomic environment, and going forward, economic performance is expected to be better, the RBI’s FSR said further deterioration in the asset quality could adversely affect the health of the banking system. “Under baseline their (PSU banks) gross NPA ratio may go up to 5.7 per cent by March 2016 which may further increase to 7.0 per cent under a severe stress scenario,” it said.