“The banking sector appears to be on course to recovery as the load of impaired assets recedes. The first half-yearly decline in the gross NPA ratio since September 2015 and the improving provision coverage ratio, being positive signals,” said
in the foreword to the report.
Stress-test results showed banks
had liquidity and should be able to withstand pressure, while there appeared to be greater discipline in credit assessment, higher sensitivity to market risk, and better appreciation of operational risks, Das said. The Insolvency and Bankruptcy Code had brought a paradigm shift, and had helped bringing in the much-needed discipline in the credit culture of the country, even as some of the resolutions lag behind the envisaged timelines.
“A time-bound resolution of impaired assets will go a long way in unclogging the credit pipeline, thus improving the allocative efficiency in the economy,” Das said.
While the system seemed healthy at present, there were risks nevertheless.
“Among the institutional risks, the asset quality deterioration of banks, risk on account of additional capital requirement, and cyber risk continued to be perceived as high-risk factors,” the report said. On day-to-day liquidity requirements, 49 out of the 54 banks
were found to be resilient in a scenario of assumed sudden and unexpected withdrawals of around 10 per cent of deposits along with the utilisation of 75 per cent of their committed credit lines.
However, banks under the prompt corrective action (PCA) framework needed capital to protect themselves from severe shocks.
For example, if the gross NPA ratio of 54 banks moves up from 10.9 per cent to 14.9 per cent, the system-level capital adequacy ratio (CAR) will decline from 13.4 per cent to 11.1 cent, and the core capital will decline from 11.2 per cent to 9 per cent for these banks.
However, 18 banks, including all 11 under the PCA framework, “might fail to maintain the required CRAR (capital to risk weighted assets ratio),” if the gross NPA ratio increased by 4 percentage points. These 18 banks had a share of 31.7 per cent of total assets of all banks.
“As many as eight public sector banks under the PCA framework may have a CRAR below the minimum regulatory level of 9 per cent by March 2019 without taking into account any further planned recapitalisation by the government,” the report noted.
The banks under the PCA are now less risky, as the restricted framework had managed to reduce their systemic footprint.
“Lending and other restrictions imposed on the banks under the PCA framework have led to a reduced impact on the system through connectivity. This has reduced the contagion losses incurred by the banking system in case of the PCA banks’ failure,” the report said, justifying the RBI’s resolve to continue with the restrictive PCA framework.
Nevertheless, there was capital infusion in banks, leading to an improved credit expansion in September 2018, driven largely by private sector banks. Non-banking financial companies (NBFC) had also increased their lending activities, while “the relative proportion of domestic bank and non-bank resources was almost evenly matched.”
Mutual funds (MFs) had emerged as one of the largest financial intermediaries in providing funds. However, the FSR sounded caution on the sector, considering the risk of credit concentration, as was evident from the recent Infrastructure Leasing & Financial Services saga. MFs had about Rs 6,500 crore of the IL&FS group’s exposure out of a total debt of around Rs 90,000 crore.
The degree of interconnectedness in the banking system had been declining slowly over the past five years.
MFs were the largest provider of liquidity in the system, with their gross receivables being around 36.5 per cent of their average asset under management. The gross receivables were around Rs 8.34 trillion. The top three recipients of their funds were banks, followed by NBFCs and housing finance
Key highlights from the Financial Stability Report
Indian banks’ bad debt fall for the first time since 2015
Banks are liquid and able to withstand sudden withdrawal of deposits
Lenders under PCA need urgent capital to maintain minimum requirement
PCA bank induced system reduces risks
Mutual funds are the largest net provider of liquidity in the system