RBI expresses concerns on the debt servicing capability of large borrowers in FSR

The Reserve Bank of India, in the twelfth issue of the Financial Stability Report (FSR), has expressed concerns on the debt servicing capability of large borrowers which, in turn, was affecting the health of the banking sector.  The FSR which was released along with the Report on 'Trend and Progress of Banking in India 2014-15' (RTP), said that the performance of the Indian banking sector remained subdued as it experienced a slowdown in balance sheet growth in 2014-15. While the PSBs registered deceleration in credit growth, the private sector banks (PVBs) and foreign banks (FBs) showed higher credit growth. Retail loan portfolio of the banks continued to grow at around 20 per cent during 2014-15.

The FSR has highlighted that the business of scheduled commercial banks (SCBs) slowed as reflected in further decline in both deposit and credit growth. Between March and September 2015, the gross non-performing advances ratio increased, whereas restructured standard advances ratio declined. Sectoral data as of June 2015 indicates that ‘industry’ continued to record the highest stressed advances ratio of about 20 per cent, followed by ‘services’ at 7 per cent. The capital to risk-weighted asset ratio (CRAR) of SCBs registered some deterioration during the first-half of 2015-16.

The report further said that among other financial institutions, the asset quality of both scheduled urban co-operative banks (SUCBs) as well as non-banking financial companies (NBFCs) deteriorated during the first-half of 2015-16 and the banking stability indicator showd that risks to the banking sector increased since the publication of the previous FSR, mainly on account of deteriorating asset quality, lower soundness and sluggish profitability.

The RBI analysed 2,711 listed non-government and non-financial listed companies from FY11 to first half of FY16. Of the companies studied, 19.4% have either negative net worth or a debt-to-equity ratio of more than or equal to two and 15.3% have a debt-to-equity ratio of greater than or equal to three. It also said capital expenditure (capex), which had risen sharply, was declining despite rising debt. This is because corporate profitability has declined and consequently companies’ debt-servicing capabilities. Capex by Indian companies in 2014-15 was at a five-year low of Rs 2.76 lakh crore.

The report also raised concerns over volatility in global financial and commodities markets. Uncertainty related to the US Federal Reserve’s interest rate hike has roiled India and other emerging markets even as markets cheered when the actual hike occurred. It also said that while the first Fed rate hike since 2006 appeared to have been factored in by the markets, the pace of further increase may have a significant bearing on market behaviour.

RBI governor Raghuram Rajan has said that corporate sector vulnerabilities and the impact of their weak balance sheets on the financial system need closer monitoring. Rajan had earlier too said that large wilful defaulters should be recognised as freeloaders and should not be lionised as industry captains.