Mumbai: Reserve Bank of India governor Raghuram Rajan has again flagged concerns over the rising level of bad loans in Indian banks, pointing out that weak corporates with lower debt-servicing capacity may worsen the situation.
The central bank is particularly worried about the financials of public sector banks, which are the worst among the lenders in terms of bad loans and capital.
In the Financial Stability Development Council (FSDC) report, Rajan has said that corporate sector vulnerabilities and the impact of their weak balance sheets on the financial system need closer monitoring. The report has called for an early passage of the bankruptcy bill to protect bank assets. “In the face of mounting potential losses, an early clearance of the proposed Insolvency and Bankruptcy Bill will also play an important role,” the RBI said. The report said that RBI’s banking stability indicator shows that risks to the banking sector have increased since the publication of the previous financial stability report due to rising bad loans and sluggish profits.
Public sector banks continued to record the highest level of stressed assets at 14.1% of their loans as against 4.6% for private banks and 3.4% for foreign banks. Stressed assets include bad loans (gross non-performing assets) and restructured assets (loans where stressed borrowers have been given more time to meet obligations).
Public sector banks are being squeezed between rising bad loans and lower earnings on one side, and shortage of capital and burden of obligations toward financial inclusion on the other. “If the inherent strengths of PSBs, in terms of their reach and experience in delivering banking services to a larger geographical and demographical domain are to be used, their efforts should be suitably compensated on commercial considerations,” the RBI said.
Five sub-sectors — mining, iron & steel, textiles, infrastructure and aviation — together constituted 24.2% of the total loans of banks and account for 53% of stressed advances. Stressed advances in the aviation industry rose to 61% in June 2015 from 58.9% in March, while stressed advances of the infrastructure sector increased to 24% from 22.9%.
While observing that India is better placed compared to emerging market peers due to lower commodity prices and prudent policy measures, the RBI has said that the government needs to factor in future Fed action and developments in China in policymaking.
On the macro front, the RBI has said that falling exports are a concern amid global developments such as the Trans Pacific Partnership, as also the depreciation of renminbi.
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