The Reserve Bank of India (RBI) on Wednesday expressed concerns on the debt servicing capability of large borrowers which, in turn, was affecting the health of the banking sector. Customers with aggregate loans of R5 crore and above are classified as large borrowers.
The central bank drew attention to the growing share of toxic assets of bigger borrowers in the financial stability report; there has been a sharp increase in the share of gross non-performing assets (NPAs) of large borrowers to the total gross NPAs to 87.4% in September from 78.2% in March. This, the central bank observed, “is a major concern to the lending institutions and other stakeholders”.
RBI governor Raghuram Rajan said in his foreword to the report that corporate sector vulnerabilities and the impact of their weak balance sheets on the financial system need closer monitoring.
In an attempt to determine the health of the corporate sector, the RBI analysed 2,711 listed non-government and non-financial listed companies from FY11 to first half of FY16. Of the companies studied, 19.4% have either negative net worth or a debt-to-equity ratio of more than or equal to two and 15.3% have a debt-to-equity ratio of greater than or equal to three.
The central bank noted that a significant increase in the gross NPA ratios of large borrowers among public sector banks, from 6.1% in March 2015 to 8.1% in September 2015, led to an increase in the gross NPA ratio of the banking system.
The standard assets — loans that are repaid at regular intervals — among large borrowers declined to 84.5% of total gross advances in September 2015 from 86.2% in March 2015.
“Credit to top 100 large borrowers (in terms of funded amount outstanding) constituted 27.6% of the credit to all large borrowers and 17.8% of the credit of all scheduled commercial banks,” the report said.
Stress tests on the credit concentration risks of banks, considering the individual borrowers, show that the impact was significant for seven banks, comprising about 6.1% of the assets, which may fail to maintain the 9% capital adequacy ratio in at least one of the scenarios.
It added that capital losses under the scenarios of default of the top borrower could be around 5%, while default of the top two borrowers could result in capital losses of 9%. As much as 13% of losses could occur in case the three top individual borrowers default.
In the same stress scenario, the RBI said, the impact on profit before tax could be 112% for default of the top three individual borrowers. The central bank further conducted stress tests to determine the impact on banks should group borrowers default. “Stress tests using 10 different scenarios on the information of group borrowers on the credit concentration risk reveal that the impact on the capital could be severe if more group borrowers default. The losses could be around 6% and 10% if one and two group borrowers default, respectively,” it said.