RBI released on 26th June 2018 Financial Stability Report as of June 2018, which is 17th in the series. The FSR reflects the overall assessment of the stability of India’s financial system and its resilience to risks emanating from global and domestic factors.
Highlights of FSR:
NPA – RBI report warns that the gross non-performing assets (GNPAs) could rise. The GNPAs of scheduled commercial banks could rise from 11.6% in March 2018 to 12.2% in March 2019. This would be the highest level of bad debt in almost two decades.
It is more worrying for GNPAs of banks under prompt corrective action framework. It is expected to rise to 22.3% in March 2019, from 21% in March 2018.
Capital – GNPAs will increase the size of provisioning for losses and affect banks’ capital position.
The capital to risk-weighted assets ratio of the banking system as a whole is expected to drop. It could come down from 13.5% in March 2018 to 12.8% in March 2019.
Bank frauds – RBI notes that more than 85% of frauds could be linked to PSBs, But their share of overall credit is only about 65%.
The PSBs are far more prone to fraud than the private banks. This is significant in light of the recent Punjab National Bank scam. It is possibly due to the corporate governance issues in public sector banks.
This also largely contributed to the weak lending practices, the core of the NPA crisis.
What are the concerns?
Banks – NPA crisis has affected the banking system and impeded credit growth in the economy. It was expected to be reaching to the lowest levels.
But RBI report comes as a caution to the health of the banks and the economy.
Economy – Economy has registered a healthy growth rate of 7.7% in the recent quarter. The deteriorating health of banks is in contrast to the recovering economy.
External risks – The RBI, however, has warned about the rising external risks. It poses a significant threat to the economy and to the banks.
Credit has already started to flow out of emerging markets such as India.
This is due to the
1. tightening of monetary policy by the US Federal Reserve
2. increased borrowing by the U.S. government
Prices – The increase in commodity prices is another risk on the horizon. This could pose a significant threat to the rupee and the fiscal and current account deficits.
All these factors could well combine to increase the risk of an economic slowdown.
It could, in turn, exert pressure on the entire banking system.
Overall assessment of systemic risks
Global and domestic macro-financial risks
- Global growth outlook for 2018 remains positive despite some recent softness.
- Spillover risk from advanced financial markets to emerging markets, however, has increased.
- Tightening of liquidity conditions in the developed markets alongside expansionary US fiscal policy and a strong US dollar have started to adversely impact emerging market currencies, bonds and capital flows. Firming commodity prices, evolving geopolitical developments and rising protectionist sentiments pose added risks.
- On the domestic front, economic growth is firming up. However, conditions that buttressed fiscal consolidation, moderation in inflation and a benign current account deficit over the last few years, are changing, thereby warranting caution.
- In the domestic financial markets, structural shifts are altering the pattern of credit intermediation and impacting market interest rates. These developments, while a healthy sign of diversified financing of the economy, call for greater vigilance of the system as a whole in order to safeguard financial stability.
Financial Institutions: Performance and risks
- The stress in the banking sector continues as gross non-performing advances (GNPA) ratio rises further.
- Profitability of SCBs declined, partly reflecting increased provisioning. While this has added pressure on SCBs’ regulatory capital ratios, the provision coverage ratio has increased.
- Credit growth of SCBs picked up during 2017-18 notwithstanding sluggish deposit growth.
- 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 by March 2019. 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; eleven public sector banks under prompt corrective action framework (PCA PSBs) may experience a worsening of their GNPA ratio from 21.0 per cent in March 2018 to 22.3 per cent, with six PCA PSBs likely experiencing capital shortfall relative to the required minimum CRAR of 9 per cent.
- 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. In parallel, the Reserve Bank’s PCA framework, by preventing further capital erosion at weaker banks, is intended to help strengthen these banks to a point of resilience from where they can restart normal operations. In addition, governance reforms – If undertaken promptly and well – would not only improve the financial performance of the banking sector but also help reduce operational risks.
- Overall, the regulatory and supervisory measures bode well for allocative efficiency and financial stability in the medium term even if there is some short-term pain in the process.
For Details on Systemic Risk Please click on the following Link: Systemic Risk Survey
What is the way forward?
RBI expects improvement in the capital position of banks with
- the government’s recapitalisation plan for banks
- the implementation of the Insolvency and Bankruptcy Code
But beyond these, government should consider changes to aspects of operational autonomy and the ownership of PSBs.
The governance reforms at PSBs, if implemented, can help improve their financial performance.
It could also reduce their operational risks.
(Source: The Hindu)
Gross and Net NPAs
Gross non-performing assets (GNPAs) refer to the sum of all the loans that have been defaulted by the borrowers within the provided period of 90 days.
The net non-performing assets are the amount that results after deducting provision for unpaid debts from gross NPA.
The GNPAs does not amount to the actual loss of the organization. But net non-performing assets amount to the actual loss, as the provision for unpaid loans has already been deducted.
Prompt Corrective Action (PCA)
PCA is primarily to take appropriate corrective action on weak and troubled banks. The RBI has put in place some trigger points to assess, monitor and control banks.
The trigger points are on the basis of CRAR (a metric to measure balance sheet strength), NPA and ROA (return on assets).
Based on each trigger point, the banks have to follow a mandatory action plan.
It prohibits them from undertaking fresh business activities such as opening branches, recruiting talent or lending to risky companies.
RBI could take discretionary action plans too apart from these.
For full Text of FSR please refer/click on the following link: Financial Stability Report June 2018
For Full text of PCA Please refer/click on the following link: Revised Prompt Corrective Action (PCA) Framework for Banks