Risks up for banking due to deteriorating asset quality: RBI

During the first half of the current fiscal, the risks for business of scheduled commercial banks in India increased due to deterioration of asset quality, the Reserve Bank of India (RBI) said on Wednesday.

There was also decline in bank deposits, credit growth and increase in stressed assets, the RBI said.

The central bank said the banking stability indicator shows that risks to the banking sector increased mainly on account of deteriorating asset quality, lower soundness and sluggish profitability.

The RBI in its 12th Financial Stability Report released on Wednesday said the business of scheduled commercial banks slowed as there was a further decline in both deposit and credit growth.

In a statement, the RBI said: "Between March and September 2015, the gross non-performing advances ratio increased, whereas restructured standard advances ratio declined.

"Sectoral data as of June 2015 indicates that 'industry' continued to record the highest stressed advances ratio of about 20 per cent, followed by 'services' at 7 percent."

"The capital to risk-weighted asset ratio (CRAR) of SCB (scheduled commercial bank) registered some deterioration during the first-half of 2015-16," the RBI said.

According to the RBI, the asset quality of both scheduled urban cooperative banks as well as non-banking financial companies (NBFCs) deteriorated during the first half of 2015-16.

"While global financial sector regulatory reform agenda is being implemented steadily, there is a need for better appreciation of cost-benefit matrix of these reforms across jurisdictions given the structurally different economies with varying national priorities," the RBI said.

The RBI said the dependence on bank finance continues even as the steps taken for developing the corporate debt market is showing some results. The government owned banks face challenges on asset quality, profitability and capital.

According to the central bank, the public sector banks may need to review their business models, and examine strategic decisions like capital planning and dividend policy.

As per the RBI's assessment India's financial system remains stable and the relatively stronger macroeconomic fundamentals lend resilience to face the still prevailing uncertainty and emerging risks in the global economy and financial markets.

However, the 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.