Mumbai: The Reserve Bank of India (RBI) has said that gross non-performing assets (NPAs) of banks are likely to rise from 9.6% in March 2017 to 10.2% in March 2018. The central bank has also warned that under a severe macro test scenario, it is expected that six banks will see a drop in their capital-to-risk-assets ratio to below the stipulated 9%.
The forecasts by the central bank are part of a financial stability report (FSR) released on Friday. In the report, the RBI conducts stress tests on banks by analysing how much of damage would the banks suffer if things got worse. For instance, if NPAs move up to 11%, as against the expected 10.2% under the baseline projection, the entire banking sector’s profits for FY18 would get wiped out.
Despite the risks in the financial sector, the RBI has said that the economy is likely to grow at 7.3% in the current fiscal. “Reforms in foreign direct investment, implementation of goods and services tax (GST), and revival in external demand are likely to contribute to a better growth outlook,” the RBI said in the report. It added that the recent rise in capital market indices reflects these positive sentiments.
Among the industries that banks lend to, the RBI analysis shows that the telecom sector is the most susceptible to credit risk. As on March 2017, the telecom industry had the largest debt with negative profitability. The industry also had relatively high leverage.
The good news for home buyers is that the RBI feels that the situation has improved compared to the previous fiscal and the central bank wants banks to lend more to this sector. According to the report, the annual increase in the all-India residential property price index (RPPI) was 8.3% in Q3 2016-17, which was lower than the previous year. Also, the gross non-performing asset (GNPA) ratio for housing finance assets at 1.2% as in March 2017 was marginally lower than the 1.3% in March 2016.
“The retail housing segment at this juncture does not seem to pose any significant systemic risks. Accordingly, the RBI recently reduced risk weights and standard asset provisioning for individual housing loans as a countercyclical measure,” the RBI said in its report.
Banks’ post-tax net rose 48% in the financial year 2017 on account of higher other operating income and moderate rise in risk provisions, according to the FSR of the RBI. The report observes that banking sectors net profit for FY17 has seen a 48% increase compared to a 61.6% drop in FY16. However, during the year, public sector banks again recorded negative returns on their assets.
“The share of other operating income in total operating income increased sharply to 36.2% per cent in 2016-17 from 30.7% in 2015-16, mostly contributed by profit on securities trading,” the FSR report said.