With various initiatives taken by the government in regards to bad loans of public sector banks yielding results, the Reserve Bank of India (RBI) governor Shaktikanta Das on Monday said banking sector appears to be on course to recovery after a prolonged period of stress.

The governor in RBI's Financial Stability Report, said there is a first half-yearly decline in gross non-performing assets (NPAs) ratio since September 2015 and improving Provision Coverage Ratio positive signals. He said stress test results suggest further improvement in NPA ratio, though its current level remains still high for comfort.

Further, governor said enhanced recognition of impairment by public sector banks (PSBs) led to a greater discipline in credit assessment, higher sensitivity to market risk and better appreciation of operational risks, "Immense effort put in by stakeholders so far is required to be buttressed with reforms in governance, supported by recapitalisation of weak state-run banks."

Talking on Insolvency and Bankruptcy Code (IBC), he said it has bridged an important institutional gap to strengthen the much needed credit discipline, but some of the IBC resolutions lagging behind the envisaged timelines, "A time-bound resolution of impaired assets will go a long way in unclogging the credit pipeline."

On banking sector's contribution, the governor said role of banks and non-banks in supporting growth needs of an emerging economy like India is well recognised and emphasis should continue to be on diligent, prudent and sound risk management practices by financial institutions.

He said under the baseline scenario, gross non-performing assets (GNPA) ratio of all scheduled commercial banks may come down from 10.8 percent in September 2018 to 10.3 percent by March 2019; PSBs’ gross NPA ratio may decline from 14.8 percent in September 2018 to 14.6 percent by March 2019 under baseline scenario; private sector banks’ gross NPA ratio may decline from 3.8 percent in September 2018 to 3.3 percent by March 2019 under baseline scenario and foreign banks’ PSB’s gross NPA ratio may decline from 3.6 percent in September 2018 to 3.1 percent by March 2019 under baseline scenario.

"Under the assumed baseline macro scenario, system level CRAR (Capital to Risk Weighted Assets Ratio) is projected to come down from 13.4 percent in September 2018 to 12.9 percent in March 2019. Further, deterioration of CRAR is projected under severe stress scenario to 12.1 percent by March 2019," said the governor.

Das said eight PSBs under prompt corrective action (PCA) may have CRAR below minimum regulatory level of 9 percent by March 2019 without taking into account any further planned government recapitalisation and total of nine banks may have CRAR below minimum regulatory level of 9 percent by March 2019 under baseline scenario.

"If macroeconomic conditions deteriorate, 10 out of 11 PCA PSBs may record CRAR below 9 percent by March 2019 under severe macro stress scenario. In total, 13 banks may have CRAR below 9 percent by March 2019 under severe stress scenario," he added.

On capital infusion in state-owned banks, the governor said under baseline scenario, CET 1 capital ratio may decline from 10.4 percent in September 2018 to 10.0 percent in March 2019, "Five banks, all PCA PSBs, may have common equity CET 1 capital ratio below minimum regulatory required level of 5.5 percent by March 2019 under baseline scenario."

"Under severe stress scenario, the system level CET 1 capital ratio may decline to 9.3 percent by March 2019. Seven SCBs, including six PCA PSBs and one non-PCA PSB may have CET1 ratio below 5.5 percent by March 2019 under severe stress," Das said.

Das said recent developments in non-banking financial companies (NBFCs) has underscored the need for greater prudence in risk-taking and there is a need for some rebalancing as excessive credit growth, especially if funded with short-term financing is not stability-enhancing.

Cautioning of mismanagement in financial institutions, Das said framework for oversight of financial conglomerates like the troubled Infrastructure Leasing & Financial Services (IL&FS) requires closer attention.

Global economic prospects have noticeably softened although risk of a recession in major economies appears modest, he observed, "Stricter enforcement of global trade, investment rules could potentially lead to market stability and win-win bargains in trade going forward."

Going forward, the governor said uptick in gross fixed capital formation coupled with recent decline in crude oil prices bodes well for sustained growth in the future.

First Published:Dec 31, 2018 5:17 PM IST