Any change in macroeconomic situation may deal a huge blow to commercial banks
Shishir Tripathi | December 30, 2014
Ringing the bell of caution for the banking sector, the Reserve Bank of India in its financial stability report says that there has been lackluster credit growth and overall risks to the banking sector remain unchanged.
The report can serve as the precursor to the bankers retreat to be held in Pune from January 2 where issues like consolidation and re-structuring of PSBs for better efficiency and capitalization needs, effective risk profiling and recovery mechanism will be deliberated upon.
While dwelling on the individual dimensions it has stated that though the liquidity position improved in the system, concerns remain on account of deterioration in asset quality.
The report raising serious concerns regarding the banking sector noted, “the growth of the Indian banking sector moderated further during 2013-14. Profitability declined on account of higher provisioning on banks’ delinquent loans and lackluster credit growth.”
On the working and status of the co-operative banks the report states that financial health of urban and rural co-operatives indicated divergent trends in terms of key indicators.
“While urban co-operative banks exhibited improved performance, the performance of primary agriculture credit societies and long term rural credit co-operatives remained a matter of concern with a further increase in their losses coupled with deterioration in asset quality.”
In respect to non banking finance companies (NFBC) the report while acknowledging the expansion in assets highlighted the deterioration of asset quality.
Raising serious questions over the asset quality of the commercial banks the report states that the asset quality of scheduled commercial banks may worsen from the current level if the macroeconomic conditions deteriorate drastically and banks are likely to fall short in terms of having sufficient provisions to meet expected losses under adverse macroeconomic risk scenarios.
Further while the capital to risk weighted assets ratio (CRAR) of the scheduled commercial banks at 12.8 per cent as on September 2014 has been marked as satisfactory by the apex bank, it has also been held by the report that “public sector banks would require substantial capital to meet regulatory requirements with respect to additional capital buffers.”
Finance minister Arun Jaitley has spoken about the need of infusing more capital to keep the banks in line with Basel-III norms. Recently, the finance ministry had asked the all public sector banks to submit capital raising plans. The offer has come following the Cabinet approval to reduction in government's stake in state-run lenders to 52 per cent
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