Category: Banking & Finance

The net inflow into mutual fund schemes more than doubled in the first half of this fiscal to ₹1.5-lakh crore against ₹60,000 crore garnered in the same period last year, according the Financial Stability report released by the RBI on Monday.

Inflows into income and debt-oriented schemes attracted the major inflow of ₹1.2-lakh crore, while growth and equity-oriented schemes accounted for a relatively meagre amount of ₹2,496 crore.

All other schemes together recorded inflow of just ₹30,000 crore.

The mutual fund industry’s assets under management increased by 11 per cent as of November-end to ₹30-lakh crore against ₹27-lakh crore logged in the same period in the previous year.

Systematic investment plans continue to remain a favoured choice for investors with number of folios increasing by 22 lakh to 337 lakh between April and September. The asset under management through SIP increased to ₹3.76-lakh crore from ₹2.39-lakh crore in the same period.

Our Bureau

The Covid-19 pandemic threatens to result in balance sheet impairments and capital shortfalls for banks, especially as regulatory reliefs are rolled back, cautioned Shaktikanta Das, Governor, Reserve Bank of India (RBI), in the latest Financial Stability Report (FSR).

As per the latest (January 2021) FSR, gross non-performing assets (GNPA) ratio of scheduled commercial banks (SCBs) could rise to 13.5 per cent by September 2021 from 7.5 per cent in September 2020 under the baseline scenario.

The July 2020 FSR had estimated that GNPA ratio of all SCBs may increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021.

SCBs’ net NPA ratio has improved from 3 per cent in March 2020 to 2.1 per cent in September 2020.

According to the latest FSR, if the macroeconomic environment deteriorates, the GNPA ratio may escalate to 14.8 per cent by September 2021 under the severe stress scenario. The previous FSR projected this ratio at 14.7 per cent under this scenario by March 2021.

The report observed that these projections are indicative of the possible economic impairment latent in banks’ portfolios.

“Congenial liquidity and financing conditions have shored up the financial parameters of banks, but it is recognised that the available accounting numbers obscure a true recognition of stress,” said Das in his ‘foreword’ to the FSR.

In the aforementioned context, the Governor emphasised that banks must exploit the congenial financial conditions and the conducive policy environment to plan for capital augmentation and alterations in business models that address emerging challenges for future expansion, while strengthening the capacity to absorb shocks and supporting the revival of the economy.

The report said that going forward, capital and liquidity cushions in banks’ balance sheets will have to contend with the rollback of regulatory forbearances announced in the wake of the pandemic.

True economic value

Capital and asset quality ratios of SCBs will be tested as the true economic value of portfolios of banks and other financial intermediaries is impacted by the disruption caused by the pandemic.

Referring to the stress tests, the report said they also indicate that SCBs have sufficient capital at the aggregate level even in the severe stress scenario, butat the individual bank level, several banks may fall below the regulatory minimum if stress aggravates to the severe scenario.

FSR cautioned that the actual capital cushion available with banks could be overstated in view of the regulatory forbearance.

The need of the hour is for banks to assess their respective stress situations and follow it up with measures to raise capital proactively, it added.

SCBs’ capital to risk-weighted assets ratios (CRARs) improved from 14.7 per cent in March 2020 to 15.8 per cent in September 2020.

Stretched valuations

Das underscored that the disconnect between certain segments of financial markets and the real economy has been accentuating in recent times, both globally and in India.

“Stretched valuations of financial assets pose risks to financial stability. Banks and financial intermediaries need to be cognisant of these risks and spillovers in an interconnected financial system,” he said.

In a period of continued uncertainty, the report opined that the risks of spillovers (with macrofinancial implications from the disconnect between certain segments of financial markets and real sector activity) has implications for the banking sector as its balance sheet is linked with corporate and household sector vulnerabilities.

“Movements in certain segments of the financial markets are not in sync with the developments in the real sector.

“The focus of the policy efforts is shifting from provision of liquidity and guarantees to supporting growth, including consumption and investment,” FSR said

Banks’ gross non-performing assets may rise to 13.5 per cent by September 2021, from 7.5 per cent in September 2020 under the baseline scenario, according to Financial Stability Report (FSR) released by the Reserve Bank of India.

If the macroeconomic environment worsens into a severe stress scenario, the GNPA ratio may escalate to 14.8 per cent, the report said.

“The stress tests indicate that the GNPA ratio of all scheduled commercial banks (SCBs) may increase from 7.5 per cent in September 2020 to 13.5 per cent by September 2021 under the baseline scenario,” the FSR report added.

Among the bank groups, public sector banks’ (PSBs) GNPA ratio of 9.7 per cent in September 2020 may rise to 16.2 per cent by September 2021 under the baseline scenario, it noted.

The gross non-performing asset (GNPA) ratio of private sector banks (PVBs) and foreign banks (FBs) may increase from 4.6 per cent and 2.5 per cent to 7.9 per cent and 5.4 per cent, respectively, over the same period.

In the severe stress scenario, the GNPA ratios of PSBs, PVBs and FBs may rise to 17.6 per cent, 8.8 per cent and 6.5 per cent, respectively, by September 2021, the report said.

“These GNPA projections are indicative of the possible economic impairment latent in banks’ portfolios, with implications for capital planning,” it added.

Only 161 cases were admitted for Corporate Insolvency Resolution Process in the first half of this fiscal year due to the temporary suspension of the process after the Covid-19 pandemic broke out.

The Reserve Bank of India’s Financial Stability Report, January 2021, which was released on Monday, revealed that 81 cases were admitted for CIRP in the first quarter of the fiscal, resolution plans were approved for 20 cases, and liquidation started for another 25.

In the second quarter, 80 cases were admitted, 22 saw the approval of the resolution plan, and liquidation started in 68 cases.

“There was a sharp decline in the number of CIRPs during Q1and Q2 of 2020 compared to the previous quarters, owing to temporary suspension of the processin the wake of the pandemic situation,” the FSR noted.

The Ministry of Corporate Affairs had, in December last year, further extended the suspension of the Insolvency and Bankruptcy Code by three months, and it will now expire on March 25.

Manufacturing sector

However, the number of CIRPs admitted since the inception of the Insolvency and Bankruptcy Code (IBC) stood at 4,008 by the end of the second quarter of the fiscal year. With as many as 1,639 cases admitted, the manufacturing sector had the largest number of cases.

The report further revealed that of the CIRPs initiated, only 277 ended in resolutions up to September-end 2020.

Liquidation has commenced in another 1,025 cases, while as many as 1,942 cases are still continuing, the data showed.

“Realisation by creditors under resolution plans in comparison to liquidation value stood at 185.2 per cent, while the realisation was 43.6 per cent in comparison to their claims,” it said.

Significantly, of the above 277 resolutions, 91 corporate debtors were under the Board for Industrial and Financial Reconstruction processes or defunct.

The CIRPs, which yielded resolution plans by the end of September 2020, took an average of 384 days (after excluding the time excluded by the Adjudicating Authority) for conclusion of the process.

The report also revealed that out of the CIRPs closed, nearly half yielded orders for liquidation.

“In 73.5 per cent of these cases (751 out of 1022 for which data is available), the corporate debtors were earlier with BIFR and / or defunct, and the economic value in most cases had already eroded before they were admitted into CIRP,” it said, adding that these corporate debtors had assets, on average, valued at less than five per cent of the outstanding debt amount.

Credit offtake to corporates that remained subdued in the first half of fiscal 2020-21 was weak in the third quarter, too (up to November 2020), pointing to risk aversion and muted demand weighing on the outlook, according to the RBI’s Financial Stability report.

Wholesale credit declined by 1.67 per cent q-o-q in the September quarter and by a further 1.36 per cent in November (over September) across all bank groups. The decline was sharper in PSBs at 2.4 per cent in November against the 1.28 per cent fall for private banks.

From the corporates side, credit growth in respect of public sector undertakings (PSUs) was comparatively resilient during the pandemic, according to the RBI report. While wholesale credit for PSU entitiesdeclined by 1 per cent in November (over September), for non-PSU entities, it fell by a sharper 2.4 per cent.

Within the non-PSU companies, it appears that the deleveraging (q-o-q) was sharper at rating grades ‘AA and above’ during 2020-21 across both PSBs and private banks. This reflects a reversal from the position in March 2020 when a rush to access credit was observed in the early phase of the pandemic breakout, according to the RBI. For instance, in March, wholesale credit grew by 5.2 per cent and 7.68 per cent q-o-q for AA and above companies across private and PSBs,respectively. This growth turned to a negative 5.8 per cent and 6.7 per cent in the September quarter for the corresponding bank groups and further to negative 7.48 per cent in November for private banks.

Deleveraging also seems to have been led by large wholesale borrowers even as relatively smaller borrowers (loans size: ₹5 to ₹100 crore) continued to record sustained credit appetite, as per the RBI report.

The report states that while the asset classification standstill inhibits the true categorisation of assets, the early tilt is towards worsening. With stress tests pointing to a deterioration in asset quality of banks, early identification of impairment and aggressive capitalisation are imperative for supporting credit growth across various sectors, alongside pre-emptive strategies for dealing with potential NPAs.