Asset quality better but risks remain, says RBI

RBI says concerns remain over liquidity, profitability of banks

Risks to the banking system had increased during the period between September 2013 and March 2014, with lenders seeing stress on their earnings and liquidity positions, despite an improvement in asset quality, the Reserve Bank of India (RBI) said in its financial stability report (FSR) released on Thursday.

“As of March 2014-end, risks to the sector increased since the publication of the previous FSR (in September 2013), as reflected by the banking stability indicator, which combines the impact on certain major risk dimensions. Though there are marginal improvements in the soundness and asset quality, concern over liquidity and profitability continues,” RBI said in the report.

Declining interest income, coupled with higher provisioning, had narrowed banks' profitability, the FSR said. In 2013-14, public sector banks recorded a fall of 30.7 per cent in their profit after tax, the report said, adding the decline in return on assets was more pronounced for this group of lenders.

State-run lenders also saw lower growth in their net interest income (difference between interest earned and interest paid), owing to muted credit demand and income losses on account of higher stressed advances. Risk provisions also added to their woes, with such provisions of public sector banks rising to 44.8 per cent from 36.9 per cent in 2012-13.

While private lenders fared relatively better, the profit after tax for all banks (state-run and private) declined 13.8 per cent in 2013-14.

As banks now had to conserve capital to meet the new Basel-III norms, their earnings growth could slow further, analysts said. According to estimates, the additional capital required by banks is about Rs 4.95 lakh crore.

Despite the uncertain economic environment, banks have been able to improve their credit quality, primarily due to lower slippages, better recovery and higher sale of non-performing loans to asset reconstruction companies and a strong recovery in the last three months of 2013-14.

Between September 2013 and March 2014, the gross non-performing asset ratio of banks improved by 20 basis points to four per cent. During the same period, the net non-performing asset ratio improved by 10 basis points to 2.2 per cent.

BANKING SECTOR PERFORMANCE

• Risks to the banking system have increased between Sept 2013 and March 2014
• Declining interest income and higher provisioning have narrowed banks' profitability
• PSBs witnessed a decline of 30.7 % in their PAT in FY14
• PAT of all banks declined by 13.8% in FY14
• Banks require additional capital of Rs 4.95 lakh crore to meet Basel-III norms