Banking system bad debts are set to improve, but the health of the system in terms of capital remains critical.
Recent capital infusion by the government has helped, but the system needs more funds, especially public sector banks (PSBs), to maintain a minimum capital to risk weighted assets ratio (CRAR) of 9 per cent. For the system as a whole, CRAR would come down from 14 per cent in March 2019 to 12.9 per cent in March 2020 under the baseline scenario, despite improvement in asset quality and recoveries as shown in Chart 1 A. If capital is not infused in the interim, five banks may find themselves short of the minimum levels in total CRAR of 9 per cent, as well as a minimum core equity capital of 5.5 per cent by March 2020 (Chart 1 B). This indicates the need for “timely infusion of equity capital into these banks,” said the Reserve Bank of India’s Financial Stability Report (FSR).
The banking system has also built up a sizeable concentration risk in its lending operations. The FSR points out that if the top group borrower fails to pay up, total CRAR can dip below 13.2 per cent and this alone can take three banks below the regulatory minimum (Chart 3).
Meanwhile, the financial system continues to remain heavily interdependent on each other in terms of liquidity. This is despite the recent defaults by some large non-banking financial companies (NBFCs). Mutual funds’ net receivables from the financial sector, which had been growing rapidly, registered a decline in the first half of 2018-19, followed by a pick-up in the second half. In contrast, PSBs had seen a jump in receivables in the first half, but scaled down operations in the second half (Chart5).
“For HFCs, there was a moderation in the growth of their net payables to the financial sector in 2018-19.” Still, there was a jump in NBFCs’ net payables, largely due to growth in the payables of big government-owned NBFCs.
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Source: Reserve Bank of India’s Financial Stability Report, June 2019