The Reserve Bank of India (RBI) has recently released the Financial Stability Report.
What does the report reveal?
The quality of banks showed an improvement with the gross non-performing assets (GNPA) ratio of Scheduled commercial banks declining from 11.5% in March 2018 to 10.8% in September 2018.
The GNPA ratio of both public and private sector banks showed a half-yearly decline, for the first time since March 2015.
GNPAs of state-run lenders falling to 14.8% in September 2018 from 15.2% in March 2018.
GNPAs of Private sector banks falling to 3.8% in September 2018 from 4% in March 2018.
The ratio of restructured standard advances (RSAs) steadily declined to 0.5%in September 2018 following the withdrawal of various restructuring schemes in February 2018.
This suggested increasing shift of the restructured advances back to NPA category.
As of September 2018, provision coverage ratio (PCR) of all banks was higher as compared to March 2018, with improvements noticed for both state-run banks and private sector banks.
Under-provisioning, banks have to set aside funds to a prescribed percentage of their bad assets.
The provisioning coverage ratio is the percentage of bad assets that the bank has to provide for (keep the money) from their own funds(profit).
A rise in PCR reveals that banks have increased its cushion to absorb losses and has also made adequate provisions for NPAs.
Also, the capital to risk-weighted assets ratio (CRAR) of banks declined marginally from 13.8% in March 2018 to 13.7% in September 2018.
The CRAR is the capital needed for a bank measured in terms of the riskiness of the assets (mostly loans) disbursed by the banks.
Higher the assets higher should be the capital of the bank.
What is the sector-wise analysis of the report?
The banks were finally witnessing reverse trend in stressed asset exposures in sectors like industry and services.
The gross NPA ratio of banks in industry sector has come down to 20.9% in September 2018 quarter.
Also, the annualised slippage ratio decelerated massively to 5% as against 13.6% in March 2018.
Slippage ratio is defined as the ratio of increase in NPAs during the year with respect to standard advances at the beginning of the year.
The declining trend was also witnessed in the service sector, where gross NPA ratio came down to 2.1% along with stressed asset ratio at 6.5% in September 2018.
On the other hand, this was not the case for agriculture and retail sector.
Among the sub-sectors within an industry, stressed advances ratios of ‘mining’, ‘food processing’ and ‘construction’ sectors have increased in September 2018 as compared to March 2018.
Also, a share of large borrowers in SCBs’ total loan portfolios and their share in GNPAs was at 54.6%and 83.4%respectively at the end of September 2018.
Top 100 large borrowers accounted for 16.0%of gross advances and 21.2%of GNPAs of SCBs.
However, in terms of percentage change in the asset quality of large borrowers, the proportion of stressed amount has come down from 30.4%in March 2018 to 25.4%in September 2018.
What are the concerns?
The RBI’s Prompt Corrective Action (PCA) framework has significantly helped in lowering risk to the banking system.
However, State-owned banks continue to have higher levels of bad loans than their private sector peers.
One reason is that PSBs have a disproportionately higher share of bad loans from among large borrowers.
Data on banking frauds are also a cause for concern.
Close to 95% of the frauds reported in the six months ended September were credit-related, with PSBs again bearing the brunt of mala fide intent on the part of borrowers.
The RBI’s report has also urged to tighten the oversight framework for financial conglomerates in the wake of the IL&FS meltdown.
Thus, despite the decline in banks’ gross NPA ratio, regulatory vigil should be increased further and should not ease at any cost.
Source: The Hindu, Economic Times
Stressed Assets
A loan whose interest and/or instalment of principal have remained ‘overdue ‘(not paid) for a period of 90 days is considered as NPA.
Restructured asset or loan are that assets which got an extended repayment period, reduced interest rate, converting a part of the loan into equity, providing additional financing, or some combination of these measures.
Hence, under restructuring, a bad loan is modified as a new loan.
A restructured loan also indicates bad asset quality of banks.
This is because a restructured loan was a past NPA or it has been modified into a new loan.
Written off assets are those amount when the bank or lender doesn’t count the money borrower owes to it.
Thus, Stressed assets = NPAs + Restructured loans + Written off assets.
