Indian banks asset quality troubles are far from over and stress tests of the Reserve Bank of India indicate that credit quality of banks could deteriorate further.
In its semi-annual financial stability report,RBI said asset quality of banks continues to remain under intense focus and the hike in provisioning for restructured loans is one of the measures taken to mitigate risks.
Gross non-performing assets (NPAs) of banks could rise to 3.8% of total loans by September from 3.4% in March,the report said. Notably,this estimate of bad loans does not consider the impact of withdrawal of regulatory forbearance on restructured loans,RBI said.
Nevertheless,there seems to be some respite for banks,especially public sector banks reeling under huge bad loans. The RBI report showed banks’ non-performing assets have fallen in January-March quarter.
Gross NPAs slipped to 3.4% of total loans in March from 3.6% in September,and net NPAs fell to 1.4% from 1.6%. This decline in NPA was attributed to the lower slippage,improved recovery and higher write-off during the quarter, said the RBI in its report. RBI,however,pointed out that improvement in asset quality in the last quarter of a financial year is due to seasonal factors. RBI expressed its worry on the rise in restructured loans as well. Sectors such as iron and steel,textiles,infrastructure that have big share in bank loans have also contributed to restructured loans and therefore are a big concern,RBI said.
RBI also reiterated its warning that while Indian corporates have been increasingly accessing capital from the international markets due to lower rates,their exposures remain unhedged to a large extent. Unhedged exposures and an eventual increase in interest rates could put pressure on corporates, cautions RBI,adding banks must price in these risks while lending to corporates.
Among risks to banks balance sheets,RBI noted that banks’ derivatives exposure remains high with the notional principal value being as high as 120% of total assets. RBI remains cautious on the practice of banks providing credit enhancements to corporate bond issuers.
RBI also raised concerns over banks credit to the housing market and said the sector needed close monitoring. Complete upfronting of construction finance by home buyers to developers and availability of construction finance at home loan rates are some of the concerns according to RBI. The share of the housing sector in overall bank credit has reduced to 9.5% in March from a high of 13.3% five year ago,the RBI said.