The latest financial stability report, a bi-annual publication by the Reserve Bank of India, has painted a grim picture about the state of India’s banking sector. The risks to the sector have increased since the last FSR in December. The level of gross non-performing advances (or GNPAs) has risen sharply from 5.1 per cent in September 2015 to 7.6 per cent in March 2016. This follows the asset quality review pushed by the RBI, which involves re-classification of restructured advances to NPAs. The bad news doesn’t stop there. According to the FSR, even at baseline assumptions, the GNPAs are likely to rise to 8.5 per cent by March 2017. But if the macroeconomic situation worsens — for instance, if growth falters — the GNPAs could swell to 9.3 per cent by March, to double the level of GNPAs since September last.
There is some good news though. Studies show that the corporate sector is slightly better off since the last FSR. In the study sample, the proportion of “leveraged” companies declined sharply from 19 per cent in March 2015 to 14 per cent in March 2016. The proportion of “highly leveraged” companies also declined from 14.2 per cent to 12.9 per cent over the same period. In terms of the ability to service debt, too, companies were better off. The proportion of companies classified as “weak” fell from 17.8 per cent in March 2015 to 15 per cent in March this year. The overall assessment then is: “India’s financial system remains stable, even though the banking sector is facing significant challenges.”
Even as companies and businesses de-leverage, it is the banking sector, especially public sector banks, which account for 70 per cent of the overall banking in the country, that needs more attention from the government. There are two broad things that the government must do. One, it needs to propel growth by raising capital expenditure because the private sector is still too weak to take the lead in investments. When the Seventh Pay Commission payouts start taking their toll, the government will have to choose its battles in terms of spending money. Additionally, the government must focus on removing any administrative and policy hurdles that have led to stalled projects and, in turn, to GNPAs. The second thing the government must do is to take targeted measures to ensure that PSU banks do not get mired in such a mess in the future. For this, the NDA government must push for structural reforms in the governance of bank boards, and try and act on the P.J. Nayak committee’s recommendation of a radical surgery.