Tag: rbi report

States need to take credible steps to address debt sustainability concerns: RBI report

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As the impact of the second wave of the Covid pandemic wanes, the State governments need to take credible steps to address debt sustainability concerns, according to a Reserve Bank of India (RBI) report.

The report “State Finance: Study of Budgets” noted that the combined debt-to-GDP ratio of States, which stood at 31 per cent at end-March 2021, is expected to remain at that level by end-March 2022 and is worryingly higher than the target of 20 per cent to be achieved by 2022-23, as per the recommendations of the Fiscal Responsibility and Budget Management (FRBM) Review Committee, chaired by NK Singh.

In view of the pandemic-induced slowdown, the 15th Finance Commission expects the debt-GDP ratio to peak at 33.3 per cent in 2022-23 (given the higher deficits in 2020-21, 2021-22 and 2022-23), and gradually decline thereafter to reach 32.5 per cent by 2025-26.

The report observed that the budgeted gross fiscal deficit (GFD) of 3.7 per cent of GDP for States for the year 2021-22 – lower than the 4 per cent level as recommended by the 15th FC – reflects the State governments’ intent towards fiscal consolidation.

The report said in 2021-22 so far (April-September 2021), the gross and net market borrowings by State governments have been 13 per cent and 21 per cent lower than in the corresponding period of the previous year, respectively.

States have preferred to borrow from the financial accommodation provided by the RBI through short-term borrowing via the special drawing facility (SDF) and ways and means advances (WMA).

Additionally, in recent years, the States have been accumulating sizeable cash surpluses in the intermediate treasury bills (ITBs) and auction treasury bills (ATBs), although they involve a negative carry of interest rates for the States. The report underscored that this warrants improvements in cash management practices.

Power sector reforms

The report emphasised that in the medium term, improvements in the fiscal position of State governments will be contingent upon reforms in the power sector as recommended by the 15th FC and specified by the Centre – creating transparent and hassle-free provision of power subsidy to farmers, preventing leakages, and improving the health of the power distribution companies (DISCOMs) by sustainably alleviating their liquidity stress.

The report opined that timely payments of State dues to DISCOMS and, in turn, by them to generation companies (GENCOS) hold the key to the sector’s financial health.

As per the assessment of the RBI’s Department of Economic and Policy Research, undertaking power sector reforms will not only facilitate additional borrowings of 0.25 per cent of GSDP by the States but also reduce their contingent liabilities due to the improvement in the financial health of the DISCOMs.

Third-tier front

On the third-tier (urban local bodies) front, the report recommended increasing the functional autonomy of civic bodies, strengthening their governance structure and financially empowering them via higher resource availability through self-resource generation and transfers, as they are critical for building resilience and effective interventions at the grass-root level.

The State governments should set up State Finance Commissions (SFC) at regular intervals, in line with the recommendations of the 15th FC. The report said States may also urge rural and urban local bodies to make audited accounts available online in a timely manner to access grants.

In addition, States should undertake local body reforms as stipulated by the Centre to improve the financial autonomy of third-tier governments. “Overall, the sub-national fiscal positions are at an inflection point.Empowerment of the third-tier government presents an opportunity that can result in better and more effective pandemic crusaders in the future,” the report said.

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Banks’ asset quality will need close monitoring: RBI Annual Report

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Banks’ asset quality will need to be closely monitored in coming quarters, with preparedness for higher provisioning in view of lifting of the interim stay on asset classification standstill by the Supreme Court on March 2021, according to the Reserve Bank of India (RBI).

In its 2020-21 annual report, RBI observed that the waiving of interest on interest charged on loans during moratorium period (March 1 to August 31, 2020) may also impinge on lending institutions’ finances.

“They are, however, better positioned than before in managing stress in balance sheets in view of higher capital buffers, improvement in recoveries and a return to profitability,” the report said.

Stress tests indicate that Indian banks have sufficient capital at the aggregate level even in a severe stress scenario, it added.

RBI emphasised that bank-wise as well as system-wide supervisory stress testing provide clues for a forward-looking identification of vulnerable areas.

The central bank assessed that resumption of the insolvency processes under the Insolvency and Bankruptcy Code (IBC), and the introduction of a pre-packaged insolvency mechanism for MSMEs (micro, small and medium enterprises) to provide an easier resolution channel are expected to bring back the focus on meaningful resolution of stressed assets by the lenders, even as necessary regulatory measures are taken to respond to the fallout of resurgent pandemic.

The report said the envisaged bad bank, the regulatory measures aimed at developing market-based mechanisms for credit risk transfer, such as securitisation, transfer of loan exposures and development of secondary loan market may help in reducing the stressed assets on the bank balance sheets.

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Small Finance Banks have greater presence in well-banked States, says RBI report

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Small Finance Banks (SFBs) have greater concentration of branch network in relatively well-banked States, according to an assessment in the Reserve Bank of India’s (RBI) latest monthly bulletin.

While there has been a rapid growth in the branch network of SFBs since their inception, this growth has been markedly concentrated in the Southern, Western and Northern regions, which are known as the relatively well-banked regions in the country, RBI officials Richa Saraf and Pallavi Chavan said in an article in the bulletin.

SFBs penetration in the North-Eastern region, which is known to be the least banked region, remains low, they added.

Following the issuance of the licensing guidelines in 2014, 10 SFBs have commenced operations so far. The first two, Capital Small Finance Bank and Equitas Small Finance Bank, started operations in 2016 followed by seven more in 2017, and one more in 2018. SFBs had 4,307 branches as at March-end 2020.

At the State level, while SFBs are making their presence felt in some of the under-served states such as Madhya Pradesh (7 per cent share in total branches) and Rajasthan (8 per cent). They continue to be concentrated in Tamil Nadu (16.6 per cent), Maharashtra (13.1 per cent), Karnataka (7.7 per cent), Kerala (5.5 per cent) and Punjab (4.7 per cent) – States with some of the lowest population per bank branch in the country, as per a preliminary assessment of these banks.

Among these, the States from the Southern region have had a high concentration of MFIs (microfinance institutions) since the time micro finance originated in India in the early-1990s, the article said.

SFBs too, many of which are MFIs turned into banks, have largely followed this pattern of branch expansion.

Furthermore, there appears to be some similarity in the branch spread of private sector banks and SFBs, with both showing a greater concentration in the relatively well-banked regions/states.

Branch expansion in semi-urban and urban centres

The article said the rapid increase of SFB branches has been in semi-urban and urban centres; in March 2020, about 39 per cent of the total SFB branches were semi-urban in nature followed by 26 per cent in urban centres

“Considering their small finance focus, the limited spread of SFBs at rural centres and even at smaller semi-urban centres leaves much to be desired,” the officials said.

Asset concentration

The authors observed that, at present, there is considerable concentration of assets within the SFB group. Top-two SFBs accounted for 46 per cent of total assets of all SFBs in March 2020 with top-three SFBs accounting for 60 per cent share.

However, the relatively big-sized SFBs have displayed lower growth of assets in more recent years. Hence, the concentration of assets within the SFB group may come down over time, the officials said

At present, SFBs constitute a minuscule portion of the financial sector (comprising the Scheduled Commercial Banks, including Regional Rural Banks and Urban Co-operative Banks, and Non-Banking Finance Company segments). Their share in total assets of the financial sector was 0.4 per cent in March 2019.

Priority sector

At the systemic level, priority sector lending accounted for about 75 per cent of the total credit of SFBs.

SFBs reported a greater concentration of loans to agriculture, trade and professional services. These three sectors accounted for about 65 per cent of the total credit of SFBs in March 2020 as compared to SCBs which lent about 66 per cent of their credit to industry, personal loans and finance.

In March 2020, 99.9 per cent and 83 per cent of SFBs total loan accounts and total loan amount, respectively, had a credit limit of up to ₹25 lakh.

Even within these, an impressive focus on very small-sized loans by these banks was evident; about 96 per cent and 48 per cent of their total loan accounts and total loan amount, respectively, had a credit limit of ₹2 lakh, or what are called as small borrowal accounts.

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RBI report: Loan losses at banks could double by Sept 2021

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In addition, banks will be called to meet the funding requirements of the economy as it traces a revival from the pandemic,” Das said.

Loan losses in the banking sector, as measured by the gross non-performing asset (GNPA) ratio, could nearly double to 13.5% by September 2021 in a baseline scenario, and to as high as 14.8% in a severe-stress scenario resulting from the pandemic, the Reserve Bank of India (RBI) said on Monday. The GNPA ratio stood at 7.5% in September 2020.

Were the scenario of severe stress to materialise, the bad loan ratio of the banking system could be the highest since March 1997, when it stood at 15.7%, according to historical data from the RBI.

“Domestically, corporate funding has been cushioned by policy measures and the loan moratorium announced in the face of the pandemic, but stresses would be visible with a lag,” the central bank observed in the December 2020 edition of its financial stability report (FSR).

The GNPA projections are indicative of the possible economic impairment latent in banks’ portfolios, with implications for capital planning. “A caveat is in order, though: considering the uncertainty regarding the unfolding economic outlook, and the extent to which regulatory dispensation under restructuring is utilised, the projected ratios are susceptible to change in a non-linear fashion,” the RBI said.

RBI governor Shaktikanta Das observed India’s banking system faced the pandemic with relatively sound capital and liquidity buffers built assiduously in the aftermath of the global financial crisis and buttressed by regulatory and prudential measures. “Notwithstanding these efforts, the pandemic threatens to result in balance sheet impairments and capital shortfalls, especially as regulatory reliefs are rolled back.

In addition, banks will be called to meet the funding requirements of the economy as it traces a revival from the pandemic,” Das said. Consequently, maintaining the health of the banking sector remains a policy priority and preservation of the stability of the financial system is an overarching goal.

With stress tests pointing to a deterioration in asset quality of banks, early identification of impairment and aggressive capitalisation is imperative for supporting credit growth across various sectors alongside pre-emptive strategies for dealing with potential NPAs, the report highlighted.

The system level capital to risk-weighted assets ratio (CRAR) is projected to drop to 14% in September 2021 from 15.6% in September 2020 under the baseline scenario and to 12.5% under the severe stress scenario. The stress test results indicate that four banks may fail to meet the minimum capital level by September 2021 under the baseline scenario, without factoring in any capital infusion by stakeholders. In the severe stress scenario, the number of banks failing to meet the minimum capital level may rise to nine, the RBI said.

The common equity tier-I (CET-1) capital ratio of SCBs may decline to 10.8% from 12.4% in September 2020 under the baseline scenario and to 9.7% under the severe stress scenario in September 2021. Furthermore, under these conditions, two banks may fail to meet the minimum regulatory CET-1 capital ratio of 5.5% by September 2021 under the baseline scenario; this number may rise to five in the severe stress scenario. At the aggregate level, SCBs have sufficient capital cushions, even in the severe stress scenario facilitated by capital raising from the market and, in case of PSBs, infusion by the government. At the individual level, however, the capital buffers of several banks may deplete below the regulatory minimum. Hence, going forward, mitigating actions such as phase-wise capital infusions or other strategic actions would become relevant for these banks from a micro-prudential perspective, the report said.

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‘Non-food credit growth down to 6% in Nov’

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Non-food bank credit growth of scheduled commercial banks (SCBs) was lower at 6 per cent year-on-year (y-o-y) in November 2020 vis-a-vis 7.2 per cent in November 2019.

However, the November 2020 credit growth figure was an improvement over the preceding month’s 5.6 per cent growth (8.3 per cent in October 2019).

Credit growth to agriculture and allied activities accelerated to 8.5 per cent in November 2020 from 6.5 per cent in November 2019, according to the Reserve Bank of India’s (RBI) statement on “Sectoral Deployment of Bank Credit”. Credit to industry contracted marginally by 0.7 per cent as compared with 2.4 per cent growth in November 2019 due to contraction in credit to large industries by 1.8 per cent in November 2020 (3 per cent growth a year ago), the central bank said.

However, credit to medium industries registered a robust growth of 20.9 per cent in November 2020 vis-a-vis contraction of 2.4 per cent a year ago.

Credit growth to the services sector accelerated to 8.8 per cent (4.8 per cent) in November 2019 mainly on the back of acceleration in credit growth to ‘transport operators’ and ‘trade’ within the services sector.

Personal loans registered a growth of 10 per cent in November 2020 as compared with 16.4 per cent growth in November 2019. Within this sector, vehicle loans continued to perform well, registering an accelerated growth of 10 per cent in November 2020 vis-a-vis a growth of 4.7 per cent in November 2019.

Data on sectoral deployment of bank credit has been collected by RBI from select 33 scheduled commercial banks, accounting for about 90 per cent of the total non-food credit deployed by all scheduled commercial banks, for the month of November 2020 .

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House Price Index moderated at 1.1% in Q2, says RBI

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The annual growth (y-o-y) in all-India House Price Index (HPI) continued to moderate, standing at 1.1 per cent in Q2 of 2020-21 (July-September), compared with 2.8 per cent in the previous quarter and 3.3 per cent a year ago, according to Reserve Bank of India (RBI) data.

The central bank observed that the all-India HPI contracted by (-) 1.1 per cent on a sequential basis (quarter-on-quarter/QoQ) in Q2:2020-21; among major cities, Delhi, Bengaluru, Kolkata and Chennai recorded sequential decline in HPI, whereas house prices in Mumbai remained around the previous quarter’s level.

The maximum contraction in HPI was in the case of Chennai at 4.72 per cent, followed by Bengaluru (3.73 per cent).

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Non-performing assets recovered via IBC rise 61% in 2019-20

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Non-performing assets (NPAs) recovered by scheduled commercial banks via the Insolvency and Bankruptcy Code (IBC) channel increased to about 61 per cent of the total amount recovered through various channels in 2019-20 against 56 per cent in 2018-19, according to latest Reserve Bank of India data.

IBC, under which recovery is incidental to rescue of companies, remained the dominant mode of recovery, according to RBI’s “Report on Trend and Progress of Banking in India 2019-20.”

In absolute terms, of the total amount of ₹1,72,565 crore recovered through various channels in 2019-20, IBC route accounted for ₹1,05,773 crore. In 2018-19, of the total recovered amount of ₹1,18,647 crore, the recovery via IBC channel was ₹66,440 crore.

“Going forward, insolvency outcomes will hinge around uncertainties relating to Covid-19.

“The government has suspended any fresh initiation of insolvency proceedings in respect of defaults arising during one year commencing March 25, 2020 to shield companies impacted by Covid-19,” the central bank said.

The report observed that the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, (SARFAESI) channel also emerged a major mode of recovery in terms of the amount recovered and the recovery rate, the report said.

Under SARFAESI, ₹52,563 crore was recovered in 2019-20 against ₹38,905 crore in 2018-19.

With the applicability of the SARFAESI Act extended to co-operative banks, recovery through this channel is expected to gain further traction, the report said.

Assets reconstruction companies

Apart from recovery through various resolution mechanisms, banks also clean up balance sheets through sale of NPAs to assets reconstruction companies (ARCs) for a quick exit.

During 2019-20, asset sales by SCBs to ARCs declined which could probably be due to SCBs opting for other resolution channels such as IBC and SARFAESI, RBI said.

The acquisition cost of ARCs as a proportion to the book value of assets declined suggesting lower realisable value of the assets, it added.

Apart from recovery through various resolution mechanisms, banks also clean up balance sheets through sale of NPAs to assets reconstruction companies (ARCs) for a quick exit.

During 2019-20, asset sales by SCBs to ARCs declined which could probably be due to SCBs opting for other resolution channels such as IBC and SARFAESI, RBI said.

The acquisition cost of ARCs as a proportion to the book value of assets declined suggesting lower realisable value of the assets, it added

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