Risks are rising for the banking sector even as credit growth slowed and slippages outpaced credit growth, said the RBI's Financial Stability Report (FSR) covering the last six months.
The risks to banking sector have increased since the previous FSR in June. The banking sector faced profitability pressures due to higher funding costs and asset quality pressures due to a slowing economy.
Even though the Capital To Risk Weighted Assets Ratio (CRAR) and Non Performing Assets Ratio (NPA) of Indian banks compared favourably with the major advanced countries as well as peer Emerging Market Economies, there has been a continuous decline in these parameters, said the report released today by the Reserve Bank of India.
The Systemic Risk Survey conducted by the RBI for the first time has identified deterioration of asset quality as the highest risk.
The year-on-year growth rate of NPAs, at 30.5 per cent, as at end September 2011 was higher than credit growth at 19.2 per cent. Slippages, that is, fresh accretion to NPAs, too, have outpaced credit growth and grew at 92.8 per cent (year-on-year) as at end September 2011.
Despite the recent spurt in NPAs, the impairment levels in Indian banks compare favourably with the banking sectors in both the advanced and peer economies.
The major sectors that contributed to the increasing trend in NPAs were the priority sector, retail, real estate and infrastructure.
In the infrastructure segment, the power and telecom sectors saw increased impairments and restructuring.
There is an increased possibility of further deterioration in asset quality as deceleration in credit growth is expected on the back of a slowing economy, the report said.
The report also said that higher provisioning requirements, consequent to higher non performing assets and higher interest expenses have put pressure on the banks' profitability.
The CRAR continued to slide, though it remained well above the regulatory minimum under both Basel I and Basel II norms. CRAR fell from 14.21 per cent as at end March 2011 to 13.5 per cent as at end September 2011. India also lags behind its peer group countries in this respect, the FSR said.