The Reserve Bank of India has painted an optimistic picture for the banking sector on the bad loans front. It said that after a prolonged period of stress, the sector appears to be on course to a recovery as the load of impaired assets lightens.
The central bank underscored that the first half-yearly decline in gross non-performing assets (GNPA) ratio since September 2015 and the improving provision coverage ratio (PCR) were positive signals.
The asset quality of banks showed an improvement with the GNPA ratio of scheduled commercial banks (SCBs) declining from 11.5 per cent in March 2018 to 10.8 per cent in September 2018.
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Under the baseline scenario, the central bank, in its latest Financial Stability Report, assessed that SCBs’ GNPA ratio may decline from 10.8 per cent in September 2018 to 10.3 per cent in March 2019.
Stress test results suggest further improvement in the NPA ratio, though its current level remains still high for comfort, the report said.
“Notwithstanding the significant costs wrought by the enhanced recognition of asset impairment in public sector banks (PSBs), it appears to have led to a greater discipline in credit assessment, higher sensitivity to market risk and better appreciation of operational risks,” said Shaktikanta Das, Governor, RBI.
The PCR of all SCBs was higher at 52.4 per cent in September 2018 compared with 48.1 per cent in March 2018, with improvements noticed for both PSBs and private sector banks.
The report said operational risks in the banking sector have assumed significance of late, calling for reforms in governance and Board oversight structures and overhaul of the extant risk management mechanism at banks.
Financial conglomerates
Referring to the IL&FS imbroglio, the report underscored that the framework for oversight of financial conglomerates (FCs) requires closer attention.
The current FC oversight undertaken by the inter-regulatory forum generally satisfies all the relevant guidelines of the Bank for International Settlements on FC supervision. However, the RBI said there is possibly some scope to further fine-tune the guidelines to identify relevant FCs, incorporate market-based feedback in their assessment and have proportionate triggers for timely action.
The recent developments relating to non-banking finance companies (NBFCs), wherein they faced liquidity issues following default on debt obligations by IL&FS and some of its arms, have underscored the need for greater prudence in risk-taking, elaborated the report.
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