India’s banking system credit growth fell to two decade lows of below 10% in fiscal year 2014-15. Given that bank credit is one of the drivers of economic growth, the fall in credit growth is worrying as the government is keen to push up growth in the economy. RBI cut the benchmark policy rate the Repo Rate by 50bps calendar year to date for banks to pass on lower interest rates to borrowers and increase credit growth. However, the cuts have had no effect on bank lending growth and the reason is the credit risk aversion of banks.
RBI is widely expected to cut the Repo Rate by another 25bps in its policy review on the 2nd of June but the rate cut may not have any effect on banks appetite to increase credit. Given a slowdown in many sectors of the economy where banks have the most credit exposure, banks asset quality is still in doubt. A rate cut can give a boost to the treasury holdings of banks as they have invested close to 29% of deposits in government bonds and falling bond yields leads to higher treasury income for banks. Banks will use treasury income to write off bad loans.
NPAs – Chronic problem for Indian Banks
Indian banks play a vital role in terms of lifelines of the economy and sustaining economic growth of the country. The asset quality of banks is an important indicator of their financial health; it also reflects the efficacy of their credit risk management and recovery environment. Asset quality is measured as NPAs (Non-Performing Assets). Since 2010-11, Indian banking asset quality has seen rapid deterioration due to continued economic slowdown. Gross non-performing advances and net non-performing advances for the banking system have continuously trended upwards. Data given below substantiates the fact that Indian banks, especially Public sector banks, are struggling with NPA problems that are not going away soon.
Since 2009 bank’s gross advances have shown a growth of 20.08% CAGR. Gross advances have increased from Rs 27,533 billion in 2009 to Rs 68,757 billion as on March 2014. It is estimated to rise to Rs 75,288 billion as of March 2015. The asset quality of the banking system has deteriorated significantly during the period and there was an increase in the total stressed assets in the banking system. Total stressed assets is NPAs plus restructured assets. Growth in restructured standard advances is also a concern. It has increased at CAGR 33.35% since 2009. In March 2014 total restructured standard advances was noted at Rs 3565 billion and is expected to rise to Rs 4234 billion as of March 2015. Restructured Standard advances to Gross Advances ratio has steadily increased from 2.73% in 2009 to 5.62% in 2015. Watch our Two Minute Concept Video on Restructured Assets.
Stressed Assets Ratio (Gross NPA+ Restructured Standard Advances to Gross Advances) for the system as a whole stood at 10.9% as at the end of March 2015. Asset quality is more distressed for Public Sector Banks.
The gross NPAs for Public Sector Banks as on March 2015 stood at 5.17% while the stressed assets ratio stood at 13.2%, which is nearly 230 bps more than the whole banking system levels. Table 3 shows continuous rise in gross NPAs of Public Sector Banks since 2008.
Provisions and Contingencies Of SCBs
(In Rs billion)
Table 4 shows that provisions and contingencies of Indian banks have tripled since 2008. This is attributed to subdued economic growth and infrastructure bottlenecks that affected large borrowers payment capacity and hence banks had to make provisions against stressed assets.
Given that Indian infrastructure sector is struggling and global commodity prices have fallen, banks’ exposure to these sectors is a big concern,table 5 depicts it.
In the last 4 years bank credit growth has significantly come down from 20% levels in 2011 to sub 10% levels as of March 2015. This means that new loan deployment is reduced and going forward banks can report reduction in slippages, which can contain NPA levels.
Global Financial Stability Report released by IMF recently, stated that 36.9 % of India’s total debt is at risk and Indian banking system has only 7.9% loss absorbing buffer, which is very low. As per a Crisil report, Indian banking system gross non-performing advances are expected to rise by Rs 600 billion in FY 2015-16, aggregating to Rs 4 trillion, which is approximately 3.4% of GDP. The 5/25 scheme, where banks can reset terms and refinance long periods of infrastructure loans every five years, can lessens stress of higher provisioning banks would have had to make if the account became a NPA.
Capital Adequacy of Banks
For the system as a whole, the CRAR (Capital to Risk (Weighted) Assets Ratio) has been steadily declining and as at the end of March 2015, it was at 12.70% against 13.01% as at the end of March 2014. It is worthwhile to note that Public Sector Banks CRAR has declined to 11.24% from 11.40% over the last year.
In fiscal 2012-13, RBI issued the final guidelines on the Basel III capital regulations. The implementation of this framework had commenced on April 1, 2013 in a phased manner and will continue through till March 31, 2019. RBI financial stability report 2012 mentions that Indian banks will require an additional capital of Rs.5 trillion to implement Basel III norms, including Rs 3.25 trillion as non-equity capital and Rs 1.75 trillion in the form of equity capital in the next five years. However if asset quality is not going to improve in the coming years, then raising capital for banks may become difficult.