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Simultaneous failure of two large borrower banks would trigger the failure of nine other banks and result in a loss of over 18 per cent of the tier-1 capital of the system, a financial stability report published by the Reserve Bank of India says.
According to the study, these two large borrower banks have remained in the inner core of the banking system consistently over the past two years. “An assessment of the impact of the liquidity contagion in the Indian banking system indicates that the failure of the large lenders in the system could have a significant downstream impact on the availability of liquidity in the system and could also cause a few other banks to be, in turn, liquidated,” the report said.
During times of distress, the financial position of banks worsens concurrently through direct or indirect links with the economy and markets on account of fall in asset values, interbank lending and information asymmetries.
Poor advances growth
“An analysis of the components contributing to banking stability show that tight liquidity, deteriorating asset quality and reducing soundness are the major contributors to the decline in stability of the banking system,” RBI noted in its report.
Restructuring of loans has been double that of total gross advances in the past three years. “Between March 2009 and March 2012, while total gross advances of the banking system grew by less than 20 per cent (compounded annual growth rate), the restructured standard advances grew by over 40 per cent,” the RBI said.
The proportion of restructured standard advances to gross total advances increased from 3.5 per cent in March 2011 to 4.7 per cent in March 2012. This has further increased to 5.9 per cent at the end of September, the RBI data showed.
RBI’s macro-stress test suggests that if the current adverse macroeconomic condition persists, the system level gross non-performing advances ratios could rise from 3.6 per cent at the end of September to 4 per cent by March-end 2013 and to 4.4 per cent by March-end 2014.
>satyanarayan.iyer@thehindu.co.in
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