|Stressing the obvious|
|Saturday, 24 December 2011 00:00|
RBI stress report shows government finance is a big issue
Juxtapose some of the charts in RBI’s latest financial stability report, and it’s difficult to figure out they’re talking about the same thing. The very first chart, India’s financial stability map, shows remarkably little deterioration between March and September (possibly the December map will be different?); while this includes ‘macro stability’ as one of the three factors, the more detailed ‘macroeconomic stability map’ shows a marked deterioration; the ‘financial markets stability map’ shows little deterioration, including in the ‘banking sector’, but the ‘banking stability map’ shows a huge deterioration in 3 of 5 parameters! Indeed, the chapter on financial institutions has sub-heads like ‘vulnerabilities in the banking sector increase …’ ‘… as capital slides due to disconnect between rate of capital augmentation and risk profile’ and ‘asset quality deteriorates since slippages outpace credit growth by a wide margin’—in the first half of the year, bad loans grew three times as fast as they did in the first half of 2006-11, and they outpaced credit growth in H1FY12. So the central message of the stability report, that things are under control, does get diluted.
As for the specifics, RBI works on various stress tests, and looks at NPAs rising by 50%, 100% and 150% in one set of simulations. While there is no meaningful problem in the first case, a 100% hike in NPAs sees the CRAR falling below 9% for 3 banks which account for 16% of the total assets of banks—this rises to 12 banks with 28% of assets for a 150% shock. Given how gross NPAs have risen around 25% in just the first six months of the year, and more SEBs, Air India/Kingfisher are yet to come for restructuring—infrastructure loans rose 20% in H1 while infrastructure NPAs rose 35%—the 100% simulation appears realistic for now.
The fact that a doubling of NPAs over the year stresses 16% of bank assets is both worrying as well as reassuring since an infusion of capital can fix this and there don’t seem to be any systemic issues. It has to be said, though, that this is quite different from the far grimmer picture painted by Barclays Capital’s recent report as well as that by Moody’s. But if you leave this aside, since the assumptions made by all are different, the important thing to keep in mind is that when assets are stressed and banks need more capital, where is this going to come from? If credit is to grow at 20-21% annually in the next five years, PSU banks need about R6 lakh crore for Tier-1 capital, and we’re not even talking of the need for capital due to higher NPAs. The government doesn’t have the money to inject capital or the sagacity to allow a dilution in equity—remember, the lack of clarity on where fresh capital is the reason why SBI got downgraded in October. The only other option is a sharp slowing in lending.