Corporate financial stress telling on bank asset quality: RBI

Falling profit margins and decreasing debt repayment capabilities of the corporate sector are adding to the concerns over deteriorating asset quality of scheduled commercial banks, reserve Bank of India (RBI) said on Thursday.

In its Financial Stability Report released on Thursday, the RBI said the deterioration in the asset quality of banks may continue for a few more quarters.

While risks to the banking sector, as reflected by the Banking Stability Indicator and Map, have moderated marginally since September 2014, concerns remain over the continued weakness in asset quality indicated by the rising trend in stressed advances ratio of scheduled commercial banks (SCBs), especially of public sector banks (PSBs).

RBI said stress tests have suggested that current deterioration in the asset quality of SCBs may continue for a few more quarters, and PSBs may have to bolster their provisions for credit risk from present levels, to meet the 'expected losses' if macroeconomic environment were to deteriorate under assumed stress scenarios.

However, capital to risk weighted assets ratio (CRAR) of SCBs, at system level, was observed to remain above the regulatory minimum even under adverse macro-economic conditions assumed in these tests.

Although the regulatory move towards encouraging greater market access and market discipline will help the development of domestic financial markets, the banking sector, especially the PSBs will be expected to continue to shoulder the needs of the accelerating growth in the economy. In this context, the policy initiatives for improving the governance and management processes at public sector banks become significant, RBI noted.

RBI said concerns emanating from rapid rise in speculative trading in stock markets in recent years highlight the need for caution, although measures have been taken to address them. Significant steps have been taken to tighten the regulations dealing with illegal money-raising activities and insider trading, and also to strengthen the risk management systems at depositories.

RBI also pointed to the need to focus on agricultural insurance needs in the wake of frequent episodes of weather related calamities and their impact, particularly on small and marginal farmers.

On the other hand, it said, there is a need to harmonise the regulation of physical commodities market and strengthening the linkages between the derivatives markets and physical (cash) markets, mainly in agricultural commodities.

Besides, in the context of expected shifts in demography in coming decades, the report has called for increased attention on old age income security measures and pension schemes, especially in the case of unorganised sector for which a new scheme has been announced by the union government.

Overall, India's relatively stronger macroeconomic fundamentals in terms of growth, inflation, current account and fiscal deficits provide a reasonable degree of resilience to Indian financial system in the event of spill-over effects from global factors.

However, with the continued uncertainty over global growth and in the absence of effective international monetary policy coordination, there can be no room for complacency, RBI added.