Underlining the sharp turnaround in the NPA cycle after over four years with the dud assets pile going down to 9.3 percent, the Reserve Bank has said despite the recent setbacks, the nation’s financial system “remains stable”.
“The financial system remains stable despite somedislocation of late,” the RBI said in the bi-annual Financial StabilityReport released Thursday evening.
The regulator, however, recommended extra vigil onnon-banking finance companies (NBFCs), and warned that a large shadow bankgetting hit can have the same impact to the system as a large bank going down.
“As the banks, especially the state-run ones, are onthe mend, the structure of non-banking credit intermediation should focus ondeveloping on more prudent lines,” governor Shaktikanta Das said in hisforeword to the report.
He also pitched for better coordination between thegovernment and the monetary authority to take care of the troubles on thegrowth front, and advised state-run banks to get leaner in such a way that theyare able to attract private capital and not overly depend on public funds.
However, there is something to cheer on the non performingassets (NPAs) front, which has dominated the banking sector for the past fouryears, with a sharp decline in the pile of dud assets.
“With the bulk of the legacy NPAs already recognised inthe banks’ books, the NPA cycle seems to have turned around,” the FSRsaid, adding gross NPAs for the system have declined sharply to 9.3 percent asof March 2019 from 11.2 percent year ago.
Under the baseline scenario, the RBI expects NPAs to improveto 9 percent by March 2020.
The stock of NPAs for state-run banks declined to 12.6percent and is likely to come down to 12 percent by March 2020, the RBI said.
In what signifies the build up of resilience in the system,the report said there has been a sharp improvement in the provision coverageratio of all banks to 60.6 percent as of March 2019 from 52.4 percent inSeptember 2018 and 48.3 percent in March 2018.
On NBFCs, the regulator warned against potential stress, andpitched for a tighter regulation of the NBFCs and housing finance companies.
“Solvency contagion losses to the banking system due toan idiosyncratic HFC/NBFC failure show that the failure of largest of these cancause losses comparable to those caused by big banks, underscoring the need forgreater surveillance over large HFCs/NBFCs,” the central bank said.
With all the five of the potentially errant companies onthis front being HFCs, the report marked out the HFCs as an important space tomonitor, it noted.
The comments come amid a series of setbacks by NBFCs andhousing finance companies since last September when one the largest players inthe segment-IL&FS group, which owes close to Rs 1 trillion to thesystem-went belly up.It can be noted that a slew of HFCs, includingAnil Ambani-run Reliance Capital firms and DHFL, have found the goingparticularly tough with multiple troubles, including debt downgrades and alsoforced asset sales as the liquidity dried up or became too costly.