Slow Credit Growth may Delay Revival of Economy: Reserve Bank of India
The Reserve Bank of India (RBI) warned against potential further downside risk for banks as asset quality concerns are far from resolved, adding that deleveraging in the heavily indebted parts of the corporate sector and slow credit growth may delay economic revival.
“Any extension of forbearance to banks on stressed assets should be viewed as a larger responsibility of the regulator to dovetail the interests of both the lenders and borrowers,” the regulator said in its Financial Stability Report released Thursday. “The Reserve Bank has been prudent enough to adopt a ‘carrot and stick’ approach while devising these regulations, which has also ensured that the borrowers have maintained their ‘skin in the game’.”
RBI’s stress tests suggest that in the baseline scenario, gross non-performing assets (NPAs) of the banking sector may rise from 10.2 per cent in September to 10.8 per cent in March 2018 and further to 11.1 per cent by September next year.
“The overall risks to the banking sector arising from asset quality concerns continue to persist,” RBI deputy governor NS Vishwanathan said. “While the ongoing deleveraging in the heavily indebted parts of the corporate sector and muted credit growth in public sector banks pose a risk to growth, the decisive recapitalisation move by the government could provide the much-needed fillip to private investment going forward. If we keep our financial system, especially the banking sector, in good shape, we can catch the tail winds of the external conditions.”
In the Report on Trend and Progress of Banking in India 2016-17, the central bank said banks need to regain their role as principal financial intermediaries to enhance credit flow and revive the investment cycle.
It prodded banks to be more proactive in shaping future business plans, innovating as well as filing insolvency proceedings against defaulters. RBI also noted that the impairment crisis in domestic banks has highlighted certain basic deficiencies with regard to the appraisal of long-term projects with a significant gestation period. A critical part of such projects was consortium lending with appraisals being carried out by professional merchant bankers with a built-in conflict of interest (since they were being paid by the borrowers).
“Banks can take advantage of the IBC (Insolvency and Bankruptcy Code) to clean up their balance sheets,” RBI said. “Instead of waiting for regulatory directions, banks can file for insolvency proceedings on their own to realise promptly the best value for their assets.”
The central bank has also highlighted the need to strengthen due diligence, credit appraisal and post-sanction loan monitoring to minimise risks.
Strategic coordination between conventional banks and new players like small finance banks, payment banks and fintech entities may be order of the day, given India’s relatively low credit penetration.
RBI said the Financial Resolution and Deposit Insurance Bill introduced in the Lok Sabha on August 10 is expected to address the moral hazard problem associated with various forms of government guarantees.