RBI report voices concerns over banks’ asset quality
The regulator is also concerned about the expansion in Indian banks’ restructured advances Sat, Dec 29 2012. Mumbai
:India’s financial system remains stable, but the deteriorating asset quality of banks will pose a challenge in a smooth transition towards new international capital adequacy norms that kick in from April under the Basel III regime, the Reserve Bank of India (RBI) said in its report on financial stability released on Friday.
“Indian banks will face challenges as they migrate to Basel III, given the declining asset quality and regulatory changes necessitating additional provisioning,” the report warned.
This is the central bank’s second financial stability report. The first, released in June, also highlighted the RBI’s concerns over banks’ deteriorating asset quality.
Slowing economic growth and high borrowing costs have made it difficult for many Indian debtors to repay their loans, causing bad loans to pile up and banks to set aside more money to cover the risk of default. In the fiscal first half ended September, gross non-performing advances of all banks rose sharply to 3.6% of total advances, from 2.9% a year ago.
The report is critical of the deteriorating asset quality of Indian banks, particularly those owned by the government.
“Aggressive lending by banks in the past, banks not exercising oversight on diversification into non-core areas by companies, banks not enforcing discipline on companies regarding unhedged forex exposures and delay in disbursements are areas on which banks ought to exercise much better control,” the report said.
The banking regulator is also concerned about the expansion in banks’ restructured advances. Between March 2009 and March 2012, while total gross advances of the banking system grew by less than 20%, their restructured standard advances grew by over 40%, the report said.
“The proportion of restructured standard advances to gross total advances increased from 3.5% in March 2011 to 4.7% in March 2012. This has further increased to 5.9% as at the end of September 2012,” it said. “The reasons for rise in restructuring may be attributed to the effects of global recession coupled with internal factors like domestic slow down, which have played a significant role in the deterioration in asset quality.”
The latest RBI report also examined the impact of the so-called liquidity contagion in the Indian banking system. It found that in case of large bank failures, there could be a significant impact on the availability of liquidity in the system and “could also cause a few other banks to be, in turn, liquidated”. Theoretically, banks which have borrowed from the liquidated bank will need to replace these borrowings through their own liquidity buffers and accessing inter-bank loans. However, this may propagate the liquidity shock in the process of calling in loans and for some banks, “the buffers and short-term inter-bank loans will not be sufficient to replace the funds borrowed from the trigger bank”.
“These banks will, in turn, be liquidated ... and will restart the next round of liquidity contagion. The contagion stops when no further banks are liquidated,” the report said.
The study, however, is academic in nature as there is no indication of such a thing happening in Indian banking system at this point.
“I don’t think anybody is worried about a systemic risk. Also, we are at the bottom of the growth cycle and things could only improve from here, depending on the global situation and investment,” said DK Joshi, chief economist, Crisil Ltd.
According to RBI, the Indian banking system is highly interlinked and had a high distress dependency during the financial crisis period. While the effect was down in 2010, it has shown an increasing trend since the beginning of 2011.
The central bank also reiterated its caution that some banks are significantly dependent on mutual funds for their funding needs and this could lead to a systemic risk in case the mutual fund industry is in stress. However, the banking sector has managed to limit their average borrowings from mutual funds at 20% of their capital funds.
Risk to banking sector increasing, says RBI
MUMBAI, December 29, 2012 From Hindu Business Line
Tight liquidity, deteriorating asset quality contribute to the decline in stability of the banking system
The Reserve Bank of India (RBI), on Friday, said that the risks to banking sector had been increasing in recent years with a continued deterioration in the stability of the banking sector since 2010. It also said that the aggregate risks remained at an elevated level during 2012.
“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,” the RBI said in its Financial Stability Report (FSR) 2012.
However, it said that a marginal improvement in the indicator during the last two quarters was observed primarily because of better liquidity condition, due to regulatory prescriptions and enhanced profitability ratios, arising out of lower provisioning coverage.
The Banking Stability Map, which reflects the relative changes in the vulnerabilities since the previous FSR, further reveals that the asset quality and soundness indicators have deteriorated vis-à-vis their position in March 2012, while the liquidity indicators show some improvement as at the end of September 2012. The profitability indicators in the current quarter, though better than March 2012, show marginal deterioration as compared to June 2012
Total bank credit grew at 15.9 per cent, while total deposits growth was 14.3 per cent as at end September 2012 (year-on-year). Despite faster credit growth relative to deposit expansion, the credit-deposit (C-D) ratio has declined to 74.4 per cent as at end September 2012 from 76.0 per cent as at end March 2012.
“The incremental C-D ratio has also declined during the half-year since March 2012, indicating the trend that banks have deployed a greater share of incremental deposits in investments and other assets,” said the RBI.
The steepest fall in growth rate of gross advances (year-on-year) as at end-September 2012 from the previous quarter was for the foreign banks; from 17.3 per cent to 6.5 per cent, followed by old private sector banks from 23.1 per cent to 18.6 per cent. There was a moderate fall in the growth rate of advances for public sector banks to 15 per cent, while the new private sector banks had a slight increase in the growth rate of advances at 22.7 per cent.
The asset quality of banks has seen considerable deterioration during the half-year under review. Gross non-performing advances (GNPA) ratio for all banks rose sharply to 3.6 per cent from 2.9 per cent. Net NPA ratio stood at 1.7 per cent as against 1.2 per cent.
The concerns on asset quality are also underscored by the increasing trend in the slippage ratio as well as ratio of slippages to actual recoveries (excluding upgradations).
“Except for foreign banks, these ratios increased for all bank groups since March 2011. However, slippage to recovery ratio for all the bank groups improved marginally during the quarter ended September 2012. With the growth rate in GNPAs continuing to tread well above the credit growth and movements in slippages remaining upward, the profitability of banks may come under pressure in the coming quarters,” the RBI said.
Restructuring of loans, particularly of big ticket loans, under the corporate debt restructuring (CDR) mechanism, has recently come under closer scrutiny due to the steep rise in the number and value of such advances.
Between March 2009 and March 2012, while gross advances grew by less than 20 per cent (compounded annual growth rate), the restructured standard advances grew by over 40 per cent. The proportion of restructured standard advances to gross 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 as at the end of September 2012.
The apex bank further said that the pressure on asset quality in the power sector had worsened since FSR 2011. “Impairments have risen in the preceding year ending September 2012. Instances of restructuring, too, have registered a steep increase in the recent quarters. The large exposure to this sector remains an area of concern for banks.”
| RBI sees pressure on banks profitability in coming quarters |
| Asset quality of banks has seen considerable deterioration due to economic slowdown, says RBI report |
http://www.business-standard.com/india/news/rbi-sees-pressurebanks-profitability-in-coming-quarters/200897/on
http://www.thehindubusinessline.com/industry-and-economy/banking/if-2-large-borrower-banks-go-under-9-other-banks-would-fail/article4249447.ece
If 2 large borrower banks go under, 9 other banks would fail
( From Hindu Business Line )
Banks more unstable now as restructured loans rise, says RBI report
MUMBAI, DEC. 28:
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.
India new bank capital rules to start in April: central bank
MUMBAI: India will start implementing new global capital rules for banks, known as Basel III, from April 1, 2013 rather than the beginning of January, the Reserve Bank of India said on Friday.
It said this would align the introduction of the rules with the start of the country's tax year, which runs from April to March. The central bank gave no other reason for the change.
The new rules have been created by international regulators to strengthen banks after the financial crisis. Under the Basel III regime, India's banks will have to hold core capital of at least seven percent of (risk weighted) assets.
The central bank had originally said in May that implementation of Basel III would begin in January. The new rules are set to be fully implemented by the end of March 2018
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