Financial Stability Report has worrisome data
The Financial Stability Report of RBI reveals a picture of relative strength, with the ratio of non-performing assets (NPAs) to total assets expected to become 11.5% in the worst-case scenario, and the capital-to-risk weighted assets ratio at an impressive 16%. Growth is expected to strengthen the world over and, despite its impact on commodity prices, India’s macro prospects are estimated to be positive. However, the report also makes it clear that some extraordinary steps would be required to shore up the finances of Indian business, to avert distress among companies and its transmission to the financial sector.
Chart 2.4 of select asset quality indicators of large borrowers merits scrutiny. Large borrowers account for 52.7% of scheduled commercial banks’ loan portfolio and 77.9% of their gross NPAs. By focusing on the health of the large borrowers, it would be possible to avert transmission of their stress to the banking system. Once regulatory forbearance is over, the seeming health of the banking system might deteriorate. The growth of special mention accounts, that is, accounts that are overdue for periods below 90 days, especially of those overdue for more than 60 days, offers little comfort. There are two ways to avert a major loan default by companies. One, they must get fresh orders. That depends on the government’s determination in spending the allocated amounts in the budget and in releasing newly announced stimulus amounts into the economy. But this is not enough. The second part of the solution is to give these borrowers a healthy injection of non-debt capital, which they do not need to service till they are back on their feet.
Immediately, banks could convert their outstanding loans into equity, in partnership with existing financial institutions that run no risk of breaching caps on equity ownership. This can be sold off, once the companies are back on their feet. In the meantime, the government can operationalise its fund-of-funds scheme and provide equity to companies big and small.