By Ruma Dubey

This is an annual event – RBI releasing its Financial Stability Report (FSR). Over the past couple of years, it has been a morose picture about the PSU banks and this year too, the FSR for FY16 does not look good for the PSU banks. The fact that these banks are stressed, struggling to survive under a deluge of bad loans – all these are well known and proven truths. So then what is the new thing which this FSR tells us?

Well, first and foremost, the RBI being the apex bank, having the advantage of a view from the top, is able to see right till the end of the tunnel. And based on that view, the RBI does see light at the end of the tunnel and we could reach that light by end of FY16. Till then we will have to bear the pain. The RBI also says pretty strongly that in current H1FY16, the PSU banks will continue to show their fragility.

The FSR once again puts the onus back on the Govt – it reiterates that banks will be able to get out of this vicious cycle of NPAs if and only if the Govt takes initiatives to boost economic growth; mere tinkering with the way in which GDP is calculated will not help. Higher public spending and speedier approvals for big ticket infra projects could hold the key to once again give momentum to the staggering investment cycle and lift up demand. The RBI has warned that if the macro-economic headwinds do not improve, bad loans situation could only get worse.

A quick look at the highlights of the FSR:

• Total stressed advances at scheduled commercial banks in India increased to 11.1% of total advances in March from 10.7% in September. This includes gross non-performing assets (GNPAs) and loans that have been restructured by banks.

• GNPAs of banks increased to 4.6% of total advances in March from 4.5% in September.

• The macro stress test of credit risk suggests that PSBs might continue to register the highest GNPA ratio. Under the baseline scenario, the GNPA ratio may increase to 4.8% by September 2015 from 4.6% as of March 2015 which could subsequently improve to 4.7% by March 2016.

• On the global macroeconomic front, it has listed two major risks – firstly the ongoing Greek crisis and secondly the US Fed hiking interest rates.

• The capital to risk-weighted assets ratio (CRAR) of SCBs at the system level improved marginally to 12.9% from 12.8% between September 2014 and March 2015. PSBs continued to record the lowest CRAR among the bank-groups. The decline in their soundness (measured in terms of CRAR) by 1.8% between March 2011 and March 2015 was the maximum, followed by foreign banks (FBs) at 1.5% and PVBs at 1.1%.

• Sectoral data as of December 2014 indicates that among the broad sectors, industry continued to record the highest stressed advances ratio at 17.9% followed by services at 7.5%. The retail sector recorded the lowest stressed advances ratio at 2%.

• For the iron and steel sector, the FSR says that five out of the top 10 private steel producing companies are under severe stress on account of delayed implementation of their projects due to land acquisition and environmental clearances among other factors.

• For the power sector, the report says that banks have restructured around Rs.530 billion of the seven DISCOMs’ exposure under FRP. The moratorium period for repayment of the principal amounting to #8377;430 billion ended by March-2015. Considering the inadequate fiscal space, it is quite likely that the state governments might not be in a position to repay the overdue principal/ installments in time and banks may be forced to continue classifying these loans as SMA-2 as is being currently done on account of delayed servicing of interest. Probability of slippage of this exposure into NPAs is very high considering the implementation of new regulatory norms on restructuring of loans and advances effective April 1, 2015.

• Five sub-sectors, namely, mining, iron & steel, textiles, infrastructure and aviation, which together constituted 24.8% of the total advances of SCBs, had a much larger share of 51.1% in the total stressed advances.

• Infrastructure and iron & steel had a significant contribution in total stressed advances accounting for nearly 40% of the total. Among the bank groups, PSBs, which had the maximum exposure to these five sub-sectors, had the highest stressed advances.

• Sub-sectors of industry, like food processing, engineering, vehicles, wood, paper, glass and glassware, construction, amongst others, showed a high and rising level of GNPA.

• PAT growth of the 28 PSU banks was at 23.6% in FY11 and in FY15, it stood at 11.4%, much better though than the decline of 14.1% in FY14.

Final verdict of the FSR - Overall, India’s relatively stronger macroeconomic fundamentals in terms of growth, inflation, current account and fiscal deficits provide a reasonable degree of resilience to Indian financial system in the event of spillover effects from global factors. However, with the continued uncertainty over global growth and in the absence of international monetary policy coordination, there can be no room for complacency.

Yes, there is pain; that’s the clear message we get from this report. What we also decipher is that unless reform process in the country does not take off on a war footing, the banking and the entire economy could falter. But the biggest message – PSBs continue to remain under the diktat of the Govt and with restricted autonomy, crony capitalism, these banks are bleeding to death. Politicians’ treating these banks like their very own, personal ATM is having a telling effect on the health of these banks. And one does not know if these attitudes will every change.

Bad loans cannot be blamed entirely on high interest rates and lower economic growth. Banks are to be blamed because when it comes to big companies, they have no verification process of end use of the funds, poor assessment and a meaningless recovery process. Will that ever change?