Book clean-up to help banks improve market valuations: FSR

RBI-mandated clean-up of books of the banks has put unprecedented pressure on their profits, but will help improve their market valuations and augment the lending capacity in medium-to-long term, as per the Financial Stability Report (FSR) released by the central bank today.
Bank's profit after tax (PAT) declined by 43 per cent during the financial year 2015-16, due to sharp increase in risk provisions and write-off, the report said.
"While AQR (Asset Quality Review) has resulted in unprecedented pressure on the profitability of some banks in the short term, the push towards cleaning up of banks' balance sheets is expected to improve their market valuations through a greater trust in accounting numbers, augment their capacity to lend more and support the economic growth in the medium to long run," it noted.

After the AQR, the scheduled commercial banks's gross non performing assets sharply increased to 7.6 per cent in March 2016 from 5.1 per cent in September 2015.
Net non-performing advances as a percentage of the total net advances increased to 4.6 per cent in March 2016 from 2.8 per cent in September 2015.
The AQR conducted during the second half of 2015-16 covered 36 banks (including all PSBs), which account for 93 per cent of gross advances by all the banks.
The sample reviewed in AQR constituted more than 80 per cent of the total credit outstanding and 5 per cent of the number of accounts of the banking system reported through CRILC (Central Repository of Information on Large Credits).

The main objectives of AQR was to examine the assessment of asset quality at the bank level and at the system level as a whole and to uniformly deal with cases of divergence in identifying NPAs and additional provisioning across bank.