Indian companies’ declining profitability, high leverage and low debt servicing capacity poses a risk to the financial sector, the Reserve Bank of India warned on Wednesday.
In its latest bi-annual financial stability report, the central bank said also that deteriorating asset quality and sluggish profitability of local banks is a matter of concern.
“Corporate sector vulnerabilities and the impact of their weak balance sheets on the financial system need closer monitoring,” RBI governor Raghuram Rajan said in the foreward to the report.
The report also highlighted banks’ sluggish deposit and credit growth in the first half of the fiscal year and indicating that gross bad loans have increased.
It pointed out that the asset quality of urban co-operative banks as well as non-banking financial companies deteriorated during the first half of 2015-16.
“While steps taken for developing corporate debt markets in India are showing some results, the dependence on bank finance continues even as the banks, especially public-sector banks, face challenges on asset quality, profitability and capital,” the RBI said.
While the government had launched initiatives like Mission Indradhanush to inject Rs 70,000 crore to recapitalise banks, the RBI is wary of the reforms. It said that state-run lenders may need to review their business models and examine strategic decisions like capital planning and dividend policies.
“Policy makers and stakeholders will need to remain watchful about the potential adverse impact of developments in the global scenario particularly increased volatility in financial markets and further slowdown in global trade,” the report added.