- Banks are currently under high pressure from the impending threat of high NPAs (Non-performing assets) for the industry.
- Reserve Bank of India (RBI) publishes its Financial Stability Report (FSR)
Financial Stability Report (FSR)
The Reserve Bank of India’s FSR for the month of July was published on last Friday. It outlined the bleak future for the Indian financial sector in upcoming quarters. The report describes various models and stress-tests which indicate that gross non-performing assets (GNPA) ratio of commercial banks could rise up to a worst-case scenario of 14.7% by March 2021 from 8.5% in March 2020. GNPA is the total bad loans a bank adds. The report also says that moratoriums on loans will have negative implications on the industry.
Banks have currently announced raising Rs 1 lakh crore in equity fundraising to offset any liquidity crunch. June ended quarter(Q1 FY21) results for the top 4 banks in India have not been entirely positive. Provisions saw a big rise in the quarter, dragging down net profits.
As we know, the stability in the financial system is very important for the growth of any economy. In her budget presentation in February, Finance Minister Nirmala Sitharaman had mentioned that the government expects to earn Rs 89,649 crore as dividends from the RBI and state-run banks and financial institutions. As the situation has quickly changed, dividend revenue will surely see a decline this financial year.
The economy currently needs a quick flush of spending by the government to restart it. But if the government is suddenly short of Rs 90,000 crore for the year (excluding drop in revenue from other sources), there is suddenly a big problem.
Reacting to the situation, banks are set to be included in the privatisation and disinvestment drive planned by the central government to raise money this fiscal. Number of Public Sector Banks (PSBs) are supposedly going to reduce to just 4 from the current number of 12. Public Sector Banks are those banks in which the government holds more than 50% stake.
NPAs and Risk Aversion
As the possibility of higher NPAs exist, risk aversion (act of avoiding risk) would increase, and banks would start giving lesser loans. As loans are the assets of banks, this risk aversion will cause revenues to decrease. This in turn will start a vicious cycle, inside which the commercial banks will be stuck in. “While risk management has to be prudent, extreme risk aversion would have adverse outcomes for all”, RBI governor Shaktikanta Das wrote in the report.
On a discussion with members of Confederation of Indian Industry (CII), the RBI Governor remarked that investments in the Infrastructure and Power industries will be key to economic revival. He declined to comment on a suggestion by HDFC chairman Deepak Parekh against extending the loan moratorium.
The report from RBI has sent shivers down Dalal Street, with all major banking sector stocks closing in red on Monday. Nifty Bank represents the 12 largest stocks from the banking sector which trade on the National Stock Exchange (NSE). As banks are the backbone of any modern economy, the index of banks in a country is a very important indicator of the economy itself.
Financial sector strengthening measures by the government will be needed to capitalise on current global sentiments favouring India. Going ahead, India’s goals of becoming the next manufacturing hub of the world will need support from the banking sector. Effective policies and interventions by RBI are the need of the hour, and hopefully they wont be too little too late.