After a focus on demonetisation and its implementation for over 45 days, the Reserve Bank of India (RBI) has once again ignited the debate around the concentration risk on banks’ books and by the regulator’s own admission, things don’t look rosy.
In the financial stability report (FSR), the regulator pointed out that while the share of large borrowers in total advances inched lower as on 30 September, than at the beginning of the financial year, these large borrowers are still haunting bankers.
According to data provided in the FSR, large borrowers—or those with funded and non-funded loans over Rs 5 crore—form about 56.5% of total advances of scheduled commercial banks (SCBs) at the end of the second quarter, as compared with 58% as on 31 March. However, large borrowers form 88.4% of gross non-performing assets (NPAs) as on 30 September in comparison to 86.4% at the beginning of this financial year.
“The asset quality of large borrowers deteriorated significantly. The share of special mention accounts (SMA)-2 increased across bank groups. The share of large borrowers’ in SCBs’ total loan portfolio declined between March and September 2016, whereas, their share in GNPAs increased during the same period,” the report said.
Over the last few years, banks have been grappling with increasing stress and a slump in credit demand among companies. The result has been an accumulation of large NPAs.
In the September quarter, 40 listed bank has reported gross net performing assets (NPAs) to Rs 6.71 trillion—up 97.12% from Rs3.41 trillion a year ago same quarter. Net NPA surged 106.12% to Rs3.88 trillion from Rs1.88 trillion.
The high concentration of troubled assets among large borrowers might be a result of increased leverage among problem sectors.
While the total borrowings by companies in chemical, computer, food products, hotel, rubber and textiles industries decreased in the one year to September this year, sectors such as cement, construction, electrical machinery, power, iron and steel, jewellery, mining, automobiles, papers, pharmaceuticals, real estate, telecommunications and transport industries contributed towards an increase in total borrowings.
A risk profile of select industries at the end of September showed that iron and steel and power industries had high leverage as well as interest burden.
Telecommunication and transport industries also had relatively high leverage.
This isn’t the first time that the banking sector regulator has warned banks against concentration risk.
In fact, the regulator also has issued guidelines to limit exposure of large companies on bank books.
The RBI on 1 December said it would cap banks’ exposure to a group of connected companies at 25% of the lenders’ core capital, seeking to reduce concentration risk in a banking industry laden with bad loans.
The central bank lowered the limit from 40% of the banks’ total capital funds, which include both Tier 1 (core) and Tier 2 capital, and gave banks until 2019 to meet the new norm.
In the case of an individual company, this limit would be changed to 20% of Tier 1 capital, compared with 15% of total capital funds currently, the central bank had said in a statement.