"With the growth rate in GNPAs (gross non-performing assets) continuing to tread well above the credit growth and movements in slippages remaining upward, the profitability of banks may come under pressure in the coming quarters," RBI said in its latest financial stability report (FSR).
"The asset quality of banks has seen considerable deterioration during the half-year ended September 2012," it said, adding that the GNPA ratio for all banks rose sharply to 3.6 percent as at end September 2012 from 2.9 percent as at end-March 2012.
Net NPA ratio stood at 1.7 percent as on September 2012, as against 1.2 percent as on end-March 2012, it said. The report also said the recent deterioration in asset quality as well as proposed changes in provisioning norms could pose challenges for banks for migrating to the new global Basel-III capital risk norms.
Final guidelines for Basel III implementation have already been issued and it will come into force in a phased manner beginning January 1, 2013. Among the bank groups, the report said, public sector banks witnessed a high degree of deterioration in asset quality.
The growth rate of GNPAs at 45.7 percent as on end-September 2012 outpaced that of gross advances during same period, highlighting the rising concerns on asset quality, it said.
"The concerns on asset quality are also underscored by the increasing trend in the slippage ratio as well as ratio of slippages to actual recoveries (excluding upgradations)," it said.
However, the slippage-to-recovery ratio for all the bank-groups improved marginally during the quarter-ended September 2012. As regards restructuring under the CDR mechanism, it been in line with increase in non-CDR restructuring. According to data furnished by the CDR Cell, the report said there has been a spurt in the number of cases referred to the CDR Cell from the year 2011-12 onwards.
As against 49 cases involving Rs 22,620 crore referred during 2010-11, 87 cases involving Rs 67,890 crore were referred during 2011-12. During the April-August period of the current year, 59 cases involving Rs 30,640 crore were referred to the CDR Cell, it said.
The reasons for rise in restructuring may be attributed to the effects of global recession coupled with internal factors like the domestic slowdown, which have played a significant role in the deterioration in asset-quality, it said.
The RBI report said that aggressive lending by banks in the past, banks not exercising oversight on diversification into non-core areas by companies, banks not enforcing discipline on companies regarding unhedged forex exposures and delay in disbursements were areas on which banks ought to exercise increased control.
Delay in administrative clearances is an equally important reason for pressure on asset-quality which needs to be corrected, it said. "The spurt in restructuring of advances is a matter of concern, though it may not have systemic dimension. The Reserve Bank is closely monitoring the position. Some correction at the level of all stake-holders may definitely improve the situation," it added.
On capital adequacy, the RBI report said that although it has deteriorated since March 2012, capital adequacy remained well above the regulatory minimum. The decline in capital adequacy ratio (CAR) was observed to be more pronounced for the public sector banks, it said. The growth in risk-weighted assets of the foreign banks was lower over the period under reference, partly explaining the improvement in their CAR position, it added.
With regard to the liquidity position of banks, the report said it has improved over the last six months, reflecting the effect of the reduction in the CRR and SLR. "The ratio of liquid assets to total assets has increased from 28.9 percent as on March 2012 to 30.1 percent at end-September 2012," it said.
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