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Asset quality on the wane: RBI

Indian banks? asset quality and soundness indicators have weakened since March, but the overall banking system is resilient enough to withstand extreme stress scenarios, said the Reserve Bank of India in its sixth financial stability report on Friday.

Financial stability report says overall banking system resilient to withstand stress

Indian banks? asset quality and soundness indicators have weakened since March, but the overall banking system is resilient enough to withstand extreme stress scenarios, said the Reserve Bank of India in its sixth financial stability report on Friday.

RBI said banks must shore up their provision coverate ratios (PCR) and warned the PCR of Indian banks is lowered compared with global peers.

Most public sector banks have cut back on their PCR over the last three quarters after RBI made 70% PCR non-mandatory. Central Bank of India, for instance, maintained a PCR of just 40% in the September quarter.

The RBI report also said stress tests show public sector banks’ capital erosion due to rising non-performing assets (NPA) could bring down their capital adequacy ratio to just 10.9% by March 2014 against the regulatory mandate of 9%.

?The Banking Stability Map, which reflects the relative changes in the vulnerabilities since the previous FSR, further reveals that the asset quality and soundness indicators have deteriorated vis-?-vis their position in March 2012…,? said the RBI report.

The report projects that bank NPAs could rise to 4% by March end and 4.4% by March 2014. Under extreme stress conditions, the system?s NPA could rise to as high as 7.6% by March 2014, the RBI said. Within the banking system, public sector banks’ NPAs could rise to 4.3% by March 2013. Further, the biggest contributor to NPAs would be agriculture sector, the RBI said.

The central bank’s systemic risk survey shows that bankers rated risk from global financial events as the biggest risk on domestic financial stability.

?Respondents feel there is a large probability of a high impact event occurring in the global financial system in the period ahead,? said the report. The probability of an impact event occuring within the domestic macroeconomy is medium, RBI said.

Liquidity risks reduce

The banking system?s vulnerability towards liquidity risk have reduced since the previous financial stability report was published, RBI said. The ratio of liquid assets to total assets has increased from 28.9% as on end March to 30.1% as on end September.

While retail deposits are the most stable form of funding, some banks continue to rely heavily on bulk deposits, the RBI said. Foreign banks had large proportion of bulk deposits in their total deposits, the RBI report said. Maintainance of statutory liquidity ratio (SLR) gave cushion to some banks whose liquidity position weakened significantly when subject to extreme stress conditions, RBI said. Banks have to invest 23% of their deposits in government securities under SLR norm.

In wake of the global financial crisis, the central bank has been publishing a stability report twice a year to monitor the domestic financial system since December 2010. RBI released its sixth financial stability report on Friday.

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First published on: 29-12-2012 at 02:36 IST
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