Banking sector on 'course to recovery' as NPAs recede: RBI

The banking sector is on "course to recovery" as the afflicting non-performing assets recede, but state-run lenders need reforms in governance, Governor Shaktikanta Das said Monday.

The weaker ones among the public sector banks need to be supported through recapitalisation, the Governor said in his foreword to RBI's half-yearly financial stability report (FSR)."After a prolonged period of stress, the banking sector appears to be on course to recovery as the load of impaired assets recedes," Das, who took charge earlier this month after the sudden exit of Urjit Patel, said.

He pointed out that the period till September has seen a decline in gross NPA ratios -- the first such dip in three years -- and also pointed out at improving provision coverage ratio, which is the ability of a bank to withstand stress, as a positive.

According to the FSR, gross NPAs ratio declined to 10.8% in September 2018 from 11.5% in March 2018, while for the state-run lenders, the same improved to 14.8% in September 2018 from close to 15.2% in March 2018.Under the baseline scenario, the GNPA ratio of all banks may come down to 10.3% by March 2019 from 10.8% in September 2018, the report said.

The Governor said even though the current NPA levels are high, stress tests done by the RBI have pointed to an improvement in the ratio in future.Having done a lot of work on the NPA front, which started with the accelerated recognition through the asset quality review, Das said there is a need for operational improvements at the state-run lenders which account for a bulk of the dud assets.

"The immense effort put in by the stakeholders so far is required to be buttressed with substantive reforms in governance and oversight regime, supported by recapitalisation of weak PSBs," he said in the comments, which come days after the Centre committed an additional Rs 41,000 crore in FY19 for the recapitalisation.

Eleven of the 20 state-run lenders are under the prompt corrective action (PCA) framework, which restricts their normal lending and is a bone of contention between the conservative regulator and a government that will be facing elections in a few months.

Das, a career bureaucrat who steered the Government's note ban move from the Finance Ministry, said despite its high costs, the NPA recognition has led to improvements in the operational risk assessment at state-run lenders.

"...it appears to have led to a greater discipline in credit assessment, higher sensitivity to market risk and better appreciation of operational risks," he said.

Das acknowledged that some of the cases referred for resolution under the two-year-old bankruptcy framework have lagged time-lines, but said the Insolvency and Bankruptcy Code (IBC) will strengthen credit discipline.

"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," he said.

Das also touched on the troubled non-bank lending sector, saying the non banking finance companies (NBFCs) need to be more prudent on risk-taking and also underlined the need to rebalance excessive credit growth, especially the one funded by short term liabilities.

The high credit growth is "not stability enhancing", Das said.Both the banks as well as non-banks need to be diligent, prudent and follow sound risk management practices as they support the growth needs of the economy, he said.Das said the slowdown in GDP growth to 7.1% is slower than expected, but pointed out to an uptick in gross fixed capital formation along with the dip in crude oil prices as a positive for a sustained growth going forward.

Globally, the threat of trade war which would have weakened growth prospects has softened, he said.A stricter enforcement of global trade and investment rules could potentially lead to market stability and win-win bargains in trade, Das said.

The report also tested the resilience of the banking system against macroeconomic shocks through macro-stress tests for credit risk.Under the baseline scenario, the GNPA ratio of all banks may come down to 10.3% by March 2019 from 10.8% in September 2018, the report said.

The GNPA ratio of state-run lenders may decline from 14.8% in September 2018 to 14.6% by March 2019 under baseline scenario, whereas private sector banks' GNPA ratio may decline from 3.8% to 3.3% in March 2019, the report said.Foreign banks' GNPA ratio under baseline scenario might decline to 3.1% in March 2019 from 3.6% in September 2018, it said.
The report said the ratio of restructured standard advances (RSAs) steadily declined in September 2018 to 0.5% following the withdrawal of various restructuring schemes in February 2018.
"This suggested increasing shift of the restructured advances to NPA category," the report said.

As of September 2018, provision coverage ratio (PCR) of all banks was higher as compared to 51% in March 2018, with improvements noticed for both state-run banks and private sector banks, the report said.

Distribution of banks GNPA ratio shows that the number of banks having GNPA ratio less than 10% has gone down in September 2018 as compared to March 2018, the report said.The capital to risk-weighted assets ratio (CRAR) of banks declined marginally from 13.8% in March 2018 to 13.7% in September 2018, it said.The CRAR of state-run banks declined from 11.7% to 11.3%, the report said.

The asset quality of the industry sector improved to 5% in September 2018 compared to 13.6% in March 2018, while that of agriculture and retail sectors declined to 6.3% and 2.3% respectively in September 2018, it said.The share of large borrowers in total loan portfolios of banks and their share in GNPAs was at 54.6% and 83.4% respectively at the end of September 2018, the report said.

The top 100 large borrowers accounted for 16% of the gross advances and 21.2% of GNPAs of banks, the report said.