The last fiscal was a pretty bad one for the banking sector. Only two public sector banks (PSBs) managed to report a net profit - Vijaya Bank and Indian Bank - while the rest of them collectively posted a net loss of over Rs 87,000 crore. The problem of spiralling non-performing assets (NPAs) was not just limited to the state-owned banks. Bad loans of the 38 listed banks collectively crossed Rs 10.17 lakh crore in the fourth quarter. In comparison, the gross NPAs of all the banks in the country had amounted to Rs 8.40 lakh crore as on December 31, 2017.
But the worst is far from over for the sector. In the RBI's Financial Stability Report, the apex bank said that the Gross NPA (GNPA) ratio of scheduled commercial banks (SCBs) is likely to rise in the current fiscal. Moreover, the banking stability indicator showed that deteriorating profitability and asset quality pose "elevated risks" to the sector's stability.
"Macro-stress tests indicate that under the baseline scenario of current macroeconomic outlook, SCBs' GNPA ratio may rise from 11.6 per cent in March 2018 to 12.2 per cent [of total loans] by March 2019," the RBI said in a statement, adding that if the macroeconomic conditions deteriorate, their GNPA ratio may increase further.
"Among the bank groups, PSBs' GNPA ratio may increase from 15.6 per cent in March 2018 to 17.3 per cent by March 2019 under severe stress scenario, whereas PvBs' [private banks] GNPA ratio may rise from 4 per cent to 5.3 per cent," read the report. "The system-level capital to risk-weighted assets ratio (CRAR) may come down from 13.5 per cent to 12.8 per cent during the period".
Referring to the 11 state-owned banks under its prompt corrective action framework (PCA), the RBI said that they may experience "a worsening of their GNPA ratio from 21 per cent in March 2018 to 22.3 per cent by this fiscal-end".
Ominously, the RBI added that six of these banks are likely to experience capital shortfall relative to the required minimum Capital to Risk (Weighted) Assets Ratio (CRAR) of 9 per cent.
To remind you, the 11 banks under the PCA framework are IDBI Bank, UCO Bank, Central Bank of India, Bank of India, Indian Overseas Bank, Dena Bank, Oriental Bank of Commerce, Bank of Maharashtra, United Bank of India, Corporation Bank and Allahabad Bank.
"The capital augmentation plan announced by the government will go a long way in addressing the potential capital shortfall, while also playing a catalytic role in credit growth at healthier banks," it added. Former Finance Minister Arun Jaitley had previously announced a Rs 2.11-lakh crore recapitalisation plan for PSBs, of which Rs 90,000 crore was reportedly infused in the last fiscal.
The FSR also talked about the growing trend of bank frauds - both in terms of quantum and reported incidents - in detail. The report revealed that in terms of the relative share of frauds [of over Rs 1 lakh], PSBs have a disproportionate share - over 85 per cent - significantly exceeding their relative business share. "A sharper rate of growth observed in total number of frauds in 2017-18, which is driven by a significant jump in card/internet banking related frauds," it added.
The report further highlighted that large borrowers accounted for 54.8 per cent of gross advances and 85.6 per cent of GNPAs. The good news is that according to the RBI, "the share of large borrowers in SCBs' total loan portfolios as well as their share in GNPAs declined marginally between September 2017 and March 2018."
Furthermore, the GNPA ratio in the industry sector rose from 19.4 per cent to 22.8 per cent between last September and March 2018 whereas stressed advances ratio increased from 23.9 per cent to 24.8 per cent. "The results of the stress tests show that among the considered sectors, the most severe shock to the power sector will cause the banking system GNPAs to rise by about 68 bps," said the report, adding, "The textile and the engineering sectors, though small in terms of total advances to that sector as compared to the infrastructure sector, also exhibited considerable transmission of stress to the banking sector." Similarly, GNPAs for housing finance assets have gone up from 1.28 per cent in March 2017 to 1.51 per cent as of March 2018.
This is not the first time that the central bank has put the spotlight on NPAs in the housing sector. Earlier this month, while announcing the 25 per cent hike in the home loan limits for priority sector lending, the RBI had said that the level of NPAs for the ticket size of up to Rs 2 lakh "has been high, and is rising briskly". So it had advised banks to strengthen their screening and follow up in respect of lending to this segment in particular. The FSR, in a similar vein, said, "Given the growing dominance of the retail housing segment in incremental credit allocations, any potential dilution in credit standards for incremental growth needs to be eschewed."
The report added that in the latest systemic risk survey (SRS), participants assigned a moderate probability to the realisation of global risks, domestic macroeconomic conditions, institutional and market risks over a six month horizon. "About 40 per cent of the respondents felt that the prospects of domestic banking sector are going to improve marginally in the next one year, while the other respondents are still concerned about the continuous rise in NPAs and faltering governance standards in banks," it said.
With PTI inputs