Ashika Monthly Insight August 2016

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AUGUST 2016 ECONOMIC REVIEW The state of the banking sector has been a matter of great concern for all stakeholders involved as much of the government’s. The government has actually blamed the RBI for deteriorating financials of banks. RBI governor Raghuram Rajan had once said that ‘band-aids’ would no longer work and banks need deep surgery. Band-aids here were referred to the restructuring of loans on more lenient terms to the ailing corporate loans which have already turned non-performing advances (NPA). The asset quality review (AQR) initiated by the RBI has actually thrown up unpleasant surprises, however for good. Post AQR which was initiated in the August-November period last year, this has resulted in huge losses for the banks (particularly PSBs) in the December 2015 as well as in March 2016 quarters. Although, most banks have come clean and the majority of the provisions have been done with, nevertheless few of them including private sector banks continue to throw unpleasant surprises as reported in the ongoing earning season. The Financial stability report (FSR) released by RBI last month has actually highlighted the deep impact to the banking sector. According to the report, the gross non-performing advances (GNPAs) rose sharply to 7.6% of gross advances in March 2016 from 5.1% in September 2015. The spike in bad loans largely reflects re-classification of restructured advances to NPAs following an asset quality review (AQR). Consequently, the overall stressed advances rose only marginally to 11.5% from 11.3% during the period, due to a reduction in restructured standard advances ratio from 6.2% in September 2015 to 3.9% in March 2016. What’s concerning is that according to the stress tests, the bad loan mess could get uglier if the assumptions of RBI actually come true. According to the FSR, even at baseline assumptions, the GNPAs are likely to rise to 8.5% by March 2017. But if the macroeconomic situation worsens, the GNPAs could swell to 9.3% by March, to double the level of GNPAs since September last. Asset quality of SCBs 32
STRONG ON CONSUMPTION NNPAs of SCBs The good news is that the FSR has also highlighted of improvements in the corporate sector and that the stressed companies are deleveraging fast and the number of ‘weak’ companies in the economy is declining. Based on analysis of 1,800 to 2,600 Non Government Non Financial (NGNF) listed companies, the FSR report concluded that the proportion of “leveraged” companies declined sharply from 19% in March 2015 to 14% in March 2016. The proportion of “highly leveraged” companies also declined from 14.2% to 12.9% over the same period. Moreover, the share of debt of these companies in the total debt also came down from 23.0% to 19.0%. The analysis also highlighted improvement in the debt servicing capacity and leverage of weak companies (interest coverage ratio
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Ashika Monthly Insight August 2016

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