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IMF warns Indian banks on buffer risks

By Ishaan Gera

  • 16 Apr 2015
IMF warns Indian banks on buffer risks

In a report on global financial stability released on Wednesday, IMF warned Indian banks of their low absorbing buffers, pointing out that the deterioration in loan quality could threaten capital levels. IMF had released its forecasts of the world economy earlier during the day stating that India, which is expected to grow at 7.5 per cent, would outpace China this year.   

The Global Financial Stability Report, which is a bi-annual publication, provides an assessment of the global financial system and markets, and addresses emerging market financing in a global context. Highlighting the quantum of risks in emerging market the report said, "Continued financial risk taking and structural changes in credit markets are shifting the locus of financial stability risks from advanced economies to emerging markets, from banks to shadow banks, and from solvency to market liquidity risks."

According to the report, the loss-absorbing buffer of the Indian banking sector is amongst the lowest at 7.9 per cent of risk-weighted assets, second only to Russia at 7.8 per cent, while the ratio is at 11.3 per cent in China. The report stated that countries with the lowest ratios are China, India and Russia, which account for about 70 per cent of the aggregate banking system assets in this sample of banks. 

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“Loss-absorbing buffers appear particularly low in Chile, Hungary, India and Russia, and deterioration in loan quality could threaten capital levels. Furthermore, in India, Russia, and Turkey, loss absorbing buffers have deteriorated quite substantially in recent years,” IMF said while adding that a significant share of debt in India is owed by firms with relatively constrained repayment capacity in terms of interest-coverage ratios.

India has seen a phenomenal rise in non-performing assets over the last year. The top-30 defaulters had bad loans of Rs 95,122 crore, more than one-third of the gross non-performing assets of PSU banks at Rs 2,60,531 crore as on December 2014. The bad loans have affected the profitability of the sector while curbing the lending of banks. Banks have been reluctant to lend even though demand for credit is on the rise.

While the government and the RBI have taken steps to contain the problem, the sector would not pick up unless confidence improves and economy gets back on the track. 

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The government plans to allocate Rs 7,940 crore  for bank recapitalisation in the current fiscal. For the last fiscal, the government had disbursed Rs 6,990 crore to nine state-owned banks based on their performance against the proposed capital infusion of more than Rs 11,000 crore.

On the other hand, RBI has taken a slew of measures to contain the problem of rising NPAs. RBI revised the limits for counter cyclical buffers allowing banks to use up to 50 per cent of their counter-cyclical buffer to provide for NPAs, up from 33 per cent.

The bank has also proposed to reduce the exposure of a bank to a business group to 25 per cent of its capital, down from the existing level of 55 per cent. RBI alongside SEBI has also agreed to ease norms for lenders to convert their debt into equity in distressed listed companies. 

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Constricted lending by Indian banks is a major problem for the government which is looking at more than an 8 per cent growth for the country but the government would first have to solve the problem of rising NPAs. The reluctance of banks to lend can weigh down on the government’s ‘Make in India’ programme. Credit growth has already come down to single digits and a fall further may also hinder India's prospects to become the world's fastest growing economy.

(Edited by Joby Puthuparampil Johnson)

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