RBI's concerns on banking and economic stability
Amit Kapoor (IANS) 28 December 2015
The RTP explicitly states that the performance of the Indian banking system remained subdued during the year due to a slowdown in the sector's balance-sheet growth
The RBI recently released two reports on the condition of banking and allied sectors in the India. The first is on trends and progress of banking sector in India 2014-15 (RTP) and the second is the financial stability report (FSR). Both offer interesting insights on the Indian economy.
The RTP explicitly states that the performance of the Indian banking system remained subdued during the year due to a slowdown in the sector's balance-sheet growth. The performance of public sector banks (PSBs) was sub-optimal compared to private sector banks (PVBs) as profitability and credit growth both declined. Along with this, in both the groups, the asset quality declined. The report also mentions policy environment changes like falling commodity prices and the strengthening US dollar. Amidst the policy environment challenges, the regulatory and policy responses during the year included initiatives for the de-stressing the banking sector, reforming and recapitalization of the PSB's, making banking more inclusive and the like. 
The FSR states that the corporate sector at present seems to be vulnerable and needs closer monitoring. This is in line with the view of the mid-year review of the finance ministry which states that of the four engines of growth - private consumption, public investment, private investment and exports - the first two are doing relatively better as compared to the last two. That private investment is not picking up can be explained by the fact that the corporate sector is under stress, and this is due to the leverage/ debt on their balance-sheets. The FSR mentions an analysis of a large sample of non-government, non-finance companies (NGNFs), roughly some 20,000 public limited companies and approximately some 255,000 private limited companies. In both these, leverage (debt to equity ratio) has gone up from 2011-12 to 2013-14. The interest coverage ratio (reflecting the debt servicing ability) has gone down for both the groups from 2011-12 to 2013-14. The profitability of the public sector companies has decreased while the profitability of private sector companies has marginally increased. An analysis of a smaller sample of 2711 NGNF's also yields another crucial insight about the sectoral composition and vulnerability. Sectorally, companies in the iron and steel and construction sector have both high leverage as well as interest burden. 
The FSR seems to be reflecting on the soundness and resilience of the financial system. The year raised several concerns. The March-September period saw a reduction in growth of both deposits and credit as well as deterioration of asset quality with an increase in the gross non-performing advances (GNPAs). Profitability of the scheduled commercial banks (SCBs) declined. The asset quality of both scheduled urban cooperative banks (SUCBs), as well as the non-banking finance companies (NBFCs), also deteriorated. The stress tests in these conditions on the banking front reveal that there is resilience, but it may become vulnerable amid deteriorating macroeconomic conditions. 
Fourth, a significant point in the FSR is on the perception of risk by experts that is captured in the systemic risk survey. At present, this framework has five broad groups - global risks, macro-economic risks, market risks, institutional risks and general risks. Compared to April 2015, the survey shows an increase in October 2015 in areas like the global slow down, sovereign risk/contagion and foreign exchange rate risk. These are now marked "high risk" in the report. The perception of some risk items have reduced over this time frame, and these include domestic inflation, current account deficit, household savings, regulatory risk and natural disaster risks. 
All this in the two reports point to the fact that a recovery is underway albeit sluggishly. The private sector and the banking sector, especially the public sector banks, seem to be inching towards stress. Over the next year, de-stressing the financial system and reducing the debt burden so that private investment happens will remain crucial challenges for Indian bankers and corporate honchos. How they fare only time will tell.
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B. Yerram Raju
8 years ago
The RBI should have gone into the roots of the decline in the quality of lending. Banks in their embrace with technology ignored the human factor. Due diligence of clients has become a routine pastime and not an essentiality. Supervision over the agricultural and MSME advances is also a serious casualty in several Public sector banks. Development Banking has been consigned to the machines and orchestrated balance sheets. For every instruction machine is the answer. The staff at different hierarchical levels sing the song of technology. A day would come when answering a customer grievance has to be also paid for. Perhaps such payment would bring more accountability. At least the remedy for improper or irresponsible reply can be sought in Courts!!
MG Warrier
8 years ago
That the problems of Indian financial sector are much deeper and may need policy initiatives from GOI additional to usually debated regulatory reforms, implementing new bankruptcy code and further dilution of Centre’s stakes in public sector banks(PSBs) is being flagged in various reports published by the Reserve Bank of India. In this respect at least, India’s central bank is transparent and it is the media and other stakeholders including GOI who are ignoring strong signals given by RBI including in the latest Annual Report (Refer Governor’s Overview: RBI Annual Report 2014-15).
The revelation that ‘while the PSBs accounted for 72 per cent of total banking sector assets, they accounted for only 42 per cent in total profits during 2014-15, with the private sector banks(PVBs) surpassing the PSBs in the share of total banking sector profits’ may not surprise anyone who has been following the pressures on PSBs to do ‘directed’ business with management and HR-related constraints emanating from their government ownership. The same RBI report gives the reason for PSBs to remain in public ownership. That is the retarded growth prospects (remaining happy with less than 30 per cent share in India’s banking business) and unwillingness to penetrate to rural and semi-urban areas evinced by private sector banks. Reluctance to take risk and an eye on creamy layer of business distinguish private sector banks from PSBs in India.

The continuing deterioration in the asset quality of banks in general, and PSBs in particular, can be traced to inadequate attention paid to infusing professionalism at the top and consequent inefficiency from top to bottom.

As other institutions like cooperative banks and NBFCs are also not in better health, needful has to be done and done quickly to restore the health of scheduled commercial banks across private and public sectors. Government should own the responsibility to ensure necessary linkages for credit provided under ‘directed lending’ so that the asset created generate enough incremental income for repayment. Banks should be guided to improve pre-disbursement appraisal and monitoring of large-sized advances. For the purpose, banks will have to acquire sufficient in-house skills and the present trend of ‘outsourcing skills’ can be harmful in the long run.

M G Warrier, Mumbai
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