Weak corporate balance-sheets to banks: RBI

Stressed balance-sheets of large- and medium-sized firms have increased the risks to the banking sector during the half-year ended September 2015 due to deteriorating asset quality, lower soundness and sluggish profitability, the Reserve Bank of India (RBI) said in its Financial Stability Report (FSR).

However, it said that though the stress tests revealed resilience, the system could become vulnerable if the macroeconomic conditions deteriorate sharply.

The total bad loans rose to 5.1% of total advances of the banking system at the end of the second quarter that ended September 30, 2015, from 4.6% in March 2015, the central bank said in the report.

In the foreword to the FSR, RBI governor Raghuram Rajan said the corporate sector vulnerabilities and the impact of their weak balance-sheets on the financial system need closer monitoring.

The report warned that the bad loans in the banking system were emanating from large corporate borrowers who are struggling to repay their debt as they are over-leveraged. This is despite the fact that the companies' ability to repay improved as measured by earnings relative to interest it owed the banks. The dominance of Ponzi borrowers can cause disruptions in the financial system when asset prices stop rising, it said. Ponzi borrowers are those whose current cash flows were insufficient to meet the debt obligations but borrowed on the faith that appreciation in the asset values could take care of such obligations.

The proportion of the bad loans of large borrowers climbed 87.4% in the half-year ended September, 2015 from 798.2% at the end of March 2015. Five sub-sectors mining, iron & steel, textiles, infrastructure and aviation which together constituted 24.2% of the total advances of banks at the end of first quarter ended June 30, 2015. They comprised 53% of the total stressed advances. Aviation sector reported stressed assets of 61% in the first quarter of 2015-16, up from 58.9% in the preceeding quarter, infrastructure sector reported a rise in stressed assets to 24.2% from 22.9% in the preceeding quarter.

The FSR said, "The performance of these sectors and their impact on the asset quality of the banks continue to be a matter of concern." Credit growth of all SCBs, on a year-on-year basis, further declined to 9.4% from 9.7% while the growth in deposits declined to 9.9% from 10.7% between March and September 2015. Within the bank-groups, public sector banks (PSBs) continued to register subdued performance in credit as well as deposits, whereas private sector banks (PVBs) and foreign banks (FBs) showed robust growth during the same period.

Rajan flagged off concerns on cyber security which, he said, will be a major challenge. He said in the foreword to the report, "Cyber security is more of a strategic issue than a mere operational concern, requiring board level understanding of the threats and solutions therefore."

"Despite domestic inflation coming down significantly, we should not lose sight of the fact that the climatic conditions have tended to be more erratic and unpredictable. This will have an impact on the volatility of inflation and perhaps its level." Rajan added in the foreword.

India, he said, appears to be relatively better placed compared to many of its emerging market peers, thanks to a combination of prudent policy measures and benign commodity prices.

"There are a few issues that we need to take note of as we prepare to take on the emerging risks," he said.