Weak corporates need meticulous monitoring: RBI

Corporate sector vulnerabilities and the impact of their weak balance sheets on the financial system need closer monitoring, according to Reserve Bank of India Governor Raghuram Rajan.

“While India appears to be relatively better placed compared with many of its emerging market peers, thanks to a combination of prudent policy measures and benign commodity prices, there are a few issues that we need to take note of as we prepare to take on the emerging risks,” Rajan said in the foreword of RBI’s Financial Stability Report (FSR).

First, corporate sector vulnerabilities and the impact of their weak balance sheets on the financial system need closer monitoring. Second, cyber security will be a major challenge, being more of a strategic issue than a mere operational concern, requiring board level understanding of the threats and solutions therefore. Third, despite domestic inflation coming down significantly, we should not lose sight of the fact that the climatic conditions have tended to be more erratic and unpredictable. This will have an impact on the volatility of inflation and perhaps its level, Rajan added.

According to RBI’s FSR, asset quality issues of banks need to be tackled head-on. “The pressure on asset quality continues to be the impediment in improving the performance of banks, especially the public sector banks (PSBs), which needs to be tackled head-on to ensure that bank credit growth is not allowed to settle at a level lower than what is considered optimum,” RBI said.

The FSR also states that public sector banks (PSBs) need to take dividend decisions which are in the interest of the shareholders.

“It is observed that PSBs pay out significant amounts as dividend to the government and other shareholders which have no relevance to their balance sheet strengths and capital planning. This also reveals a cross-subsidisation by better banks (given their relatively higher pay outs but a disproportionately higher capital infusion into weaker banks by the government). This pattern of dividend pay outs is not consistent with the dividend irrelevance theory. Thus, it is imperative that PSBs approach their dividend decisions as strategic business decisions which are in keeping with their objective of shareholder wealth maximisation,” RBI says in the FSR.

Previous FSRs have discussed in detail different dimensions of the challenges on the asset quality front along with significant regulatory measures taken in recent years for addressing them. While the fresh policy measures with respect to some of the stressed sectors are expected to help ease the pressure to some extent, the results may take time to manifest themselves fully, RBI added.