Banking sector to get valuation boost with AQR Exercise: FSR Report

The Reserve Bank of India today released its Financial Stability Report (FSR) June 2016, a biannual publication and the thirteenth in the series six months after it flagged concerns over weak corporate balance sheets and conducted its first asset quality review (AQR) of banks.

The Reserve Bank of India (RBI) has warned that risks to the banking industry's stability have increased sharply, indicating more pain ahead.

The report suggests that India's financial system remains stable, even though the banking sector is facing significant challenges.

"Global recovery remains fragile amidst weak and uneven growth, a slowdown in world trade and prevailing uncertainties in finance and commodities markets and structural reforms remain the key for macroeconomic stability," the RBI report adds.

The latest edition of the regulator's financial stability report (FSR) says that the gross non-performing assets (GNPAs) of banks jumped to 7.6 percent in March from 5.1 percent in September.

The top 100 borrowers accounted for nearly a fifth of these NPAs. Total stressed assets increased slightly to about 11.5 percent of banks' combined loan book.

This edition of the FSR also captures the impact of RBI's AQR, which forced banks to label a large stock of stressed loans as bad and set aside money to cover the risk of default.

The report shows that as a baseline case, the GNPA ratio would climb to 8.6 percent of total advances by September from 7.6 percent in March.

The GNPA ratio is expected to stabilize at 8.5 percent by March 2017, the FSR said adding that this could jump to 9.5 percent under severe stress scenario.

The exercise sought to validate objective compliance with applicable income recognition, asset classification and provisioning (IRACP) norms and exceptions were reported by the supervisors as divergences in asset classification and provisioning.