Stressed banking sector might drag down growth: RBI report

FSR report by the RBI said stress testing indicated banks NPAs ratio might rise from 9.6% in end-March 2017 to 10.2% by end-March 2018
The financially stressed banking sector and leveraged corporate balance sheets might block the country’s economic growth, says the Financial Stability Report (FSR). 


The FSR, a 6-monthly report issued by the Reserve Bank of India (RBI) says investment demand remains weak.


On asset quality at commercial banks, the FSR said stress testing indicated that under a baseline scenario, their gross non-performing assets ratio might rise from 9.6 per cent in end-March 2017 to 10.2 per cent by end-March 2018. If macro economic conditions deteriorate, this ratio could increase. Stress on the books would also impact banks’ capital adequacy ratio (CAR),  a measure of their ability to absorb losses. Under the baseline macro scenario, two banks might fail to meet the minimum regulatory level of nine per cent by March 2018.


Things could be grave if macro conditions deteriorate, since 6 banks might record a CAR below nine per cent under this scenario, it stated. Under such a severe stress scenario, the system-level CAR might decline from 13.3 per cent in March 2017 to 11.2 per cent by March 2018.


In this context, it said, the RBI and the government were pro-actively taking steps to resolve the NPA challenges; the former had activated Prompt Corrective Action to stem the slide. However, nothing can replace credit discipline and appreciation of the sanctity of commercial contracts, to ensure a robust financial system.


The 6-monthly report reviews macro economic conditions and the financial sector. This one says the domestic outlook remains positive, with macro economic stability. Liquidity conditions remain easy.  The current account deficit remains contained. And, expectations of accelerated reforms and political stability reinforce the economic outlook. There is also optimism on global economic prospects, after years of sluggish growth. 


Yet, the FSR said, dilemmas seem to continue on normalisation of monetary policy in advanced economies. This might have lent comfort to the financial markets, as seen from the record stock prices and benign treasury yields in the US. However, geopolitical risks remain elevated, with implications for financial markets and the broader economy. At home, it says, a slump in credit disbursed by public sector banks was partly offset by finance companies, mutual funds and the capital market. However, these cannot fully substitute for banks. Hence, steps to restore the health of the banks assume urgency.


From April 2018 commercial banks in India, excluding regional rural banks, will begin to write their financial statements in accordance with new accounting standards. This might push the bill for provisioning on expected losses from stressed loans.


Going beyond the banking sector, the report adds that Strides in big data and business analytics may soon help insurance companies to write a single comprehensive policy providing protection for life and non-life risks.


There is a talk that the separation between various types of insurance becoming a history.

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