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  3. Indian banks vulnerable to profit decline as they face slow credit growth: IMF

Indian banks vulnerable to profit decline as they face slow credit growth: IMF

07 Oct 2016 Evaluate

Calling for additional and timelier action to deal with the problem of bad loans, International Monetary Fund (IMF) in its latest Global Financial Stability report has said that Indian banks are vulnerable to further decline in profits as they face slow credit growth and elevated non-performing assets.

The report pointed that gross non-performing assets (NPAs) of public sector banks have surged from 5.43 per cent (Rs 2.67 lakh crore) of advances in 2014-15 to 9.32 per cent (Rs 4.76 lakh crore) in 2015-16. Bank loan-loss reserves have fallen short of the expected loss on non-performing loans under the current debt-at-risk in India. The potential losses arising from adverse deleveraging would require additional provisions for many banking systems and the pressure is more acute in India where loan-loss reserves are low relative to potential losses.

As per the report, the Indian banking sector, particularly public sector banks, have seen a sharp rise in their NPAs in the last couple of years. The Reserve Bank has already nudged lenders to set aside more funds for stressed loans and clean up their balance sheet by March 2017. To deal with the bad loan problem, IMF has suggested that corporate insolvency frameworks should be upgraded, including by facilitating out-of-court settlement and debt-for-equity swaps, with well-defined and transparent rules. Also, contingency plans to manage corporate distress should be put in place.

IMF said that this should include a timely, market-based restructuring framework that minimizes moral hazard, while providing for limited state support if necessary. Where available, banks should draw on their capital reserves to cushion losses. But where these reserves are insufficient, policymakers will have to balance necessary prudential tightening against the risk of being excessively procyclical. On managing the impact of corporate distress, it said that slower growth and corporate strains will erode banks' asset quality.


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