The government’s move to recapitalise public sector banks to enable them to lend afresh and institutionalise a system to reduce stressed loans through time-bound Insolvency and Bankruptcy Code justifiably raised hopes of a solution to the twin balance sheet problem. The balance sheets of both public sector banks and quite a few large corporate houses are in terrible shape and were seen as a major obstacle to investment and reviving growth. But the latest Financial Stability Report (FSR) of the Reserve Bank of India (RBI) has raised some pertinent questions about such moves having a sustainable solution. And it is not only about the public sector banks, which account for almost 70 per cent share in the country. The FSR, released last week, shows even private banks are experiencing much turbulence on bad loans. Another report by the International Monetary Fund, also released last week, raised a red flag by saying that a group of public sector banks is highly vulnerable to further declines in asset quality and higher provisioning needs.
The FSR makes several key observations that are likely to have a bearing on how effectively the Indian economy manages to regain its growth momentum. Even though the credit growth of scheduled commercial banks (SCBs) improved between March and September this year, the banking stability indicator (BSI) suggests that the asset quality in the Indian banking sector is worsening. The ratio of gross non-performing advances (GNPAs) of SCBs has gone up from 9.6 per cent to 10.2 per cent over this period. What is striking is that while the GNPAs for public sector banks grew by 17 per cent, year-on-year, those of private sector banks shot up by almost 41 per cent. Going forward, the RBI’s analysis concludes that the GNPA ratio may increase to 10.8 per cent by March 2018 and further to 11.1 per cent by September 2018.
Stress tests conducted by the RBI show that under a ‘severe stress’ scenario, while the system-level capital adequacy of banks will remain above the regulatory threshold of 9 per cent, at the individual bank level, 23 banks, having a share of 40.7 per cent of total bank assets, might fail to maintain the required level of capital adequacy. The FSR says that risks to the banking sector remain elevated and are higher than what they were at the time of the publication of the last FSR in June. According to the report, 33 banks, which have a 74 per cent share in the total advances for the sector, are unable to meet their “expected losses” with their current level of provisioning.