Financing external deficit is a key
challenge for bank provisions.
Gross non-performing loans as a
percentage of total assets of all scheduled commercial banks are expected to
inch up to around 3.8% by September this year from 3.4% in March, RBI’s macro
stress tests for credit risks showed.
Going ahead, if the situation turns better, the
ratio could improve to 3.5% by the end of fiscal 2014 or conversely, worsen to
4.4% under tough conditions in the same period.
“Construction and agriculture are expected to register the highest NPA ratios of around 4.7-4.8% by March 2014, followed by the iron and steel sector,” the report read.
Additionally, the central bank has taken note of India’s increasing vulnerability to the volatile external markets, and the rise in India’s overall external debt is only rubbing it in. This stood at $390 billion, up $44.6 billion from last year.
“Construction and agriculture are expected to register the highest NPA ratios of around 4.7-4.8% by March 2014, followed by the iron and steel sector,” the report read.
Additionally, the central bank has taken note of India’s increasing vulnerability to the volatile external markets, and the rise in India’s overall external debt is only rubbing it in. This stood at $390 billion, up $44.6 billion from last year.
Though the central bank is somewhat convinced about the current level of provisions, terming it as “adequate”, a gap may surface in the case of a severe stress.
The Reserve Bank of India’s (RBI)
half-yearly Financial Stability Report has hit the nail right on the head. It
has not just talked about the deepening of risks for the banking sector but
also voiced concerns about a possible deterioration in asset quality if the
current bout of macroeconomic conditions persists.
The RBI is unequivocal that Indian
markets should get ready for high volatility and uncertainty in days ahead as
the United States and other central banks roll back their ultra-loose monetary
policies in the medium term. The possibility of withdrawal of stimulus has
already resulted in large capital outflows and extreme volatility in Indian
equity and currency markets.
“The high current account deficit and its financing remain stress points for the Indian economy as evident from the recent depreciation of the rupee on global cues,” the RBI said as much in the report.
But on a positive note, it sounded hopeful that recent measures taken by the government to curb gold imports will take hold.
Talking of weeding out mis-selling in insurance policies, wealth management products and services and other unhealthy practices at some banks, the RBI underscored the need to tighten the consumer protection rules, adherence to know-your-customer and anti-money laundering guidelines, and removal of distorted incentive structures.
“The high current account deficit and its financing remain stress points for the Indian economy as evident from the recent depreciation of the rupee on global cues,” the RBI said as much in the report.
But on a positive note, it sounded hopeful that recent measures taken by the government to curb gold imports will take hold.
Talking of weeding out mis-selling in insurance policies, wealth management products and services and other unhealthy practices at some banks, the RBI underscored the need to tighten the consumer protection rules, adherence to know-your-customer and anti-money laundering guidelines, and removal of distorted incentive structures.
The RBI also pointed out that financing the wide current account deficit (CAD) has emerged as a key challenge from the perspective of macroeconomic stability. India’s CAD stood at record high of 4.8% for the last financial year. Even though, it is expected to moderate next year, continuous financing of the gap could become an issue.
The central bank also noted that the gross domestic savings as a proportion to GDP fell to 30.8% in 2011-12 from 36.8% in 2007-08 . This was mainly because of a drop in financial savings and its shift to real estate and gold.
The central bank’s concerns are understandable as certain companies of late have been found raising money from people illegally and there is lack of clarity in legal provisions and roles of different agencies in this regard. It sees better information sharing and increased coordination with participation from the state
governments as the answer to
plug gaps in the regulatory framework.