India Ready For External Shocks, But Its Banks Are Drowning In Debt
MUMBAI: The Reserve Bank of India released the Financial Stability Report (FSR) for June 2015. It presents a more resilient picture of the economy, but warns about Indian banks' high levels of bad loans that have worsened their ability to repay debt.
BANK DEBT WARNING
Banks' leverage has increased, the report said, which will further strain a sector groaning under bad loans. High levels of corporate debt are hindering banks' ability to pass on lower interest rates and boost loans.
Monetary policy transmission has been a major headache for the RBI. India's banks have made only nominal cuts to base lending rates despite a 75 basis point reduction in the central bank's policy rate since the start of the year. Governor Raghuram Rajan has previously asked banks to respond with more agility to the three rate cuts by the central bank this year.
Infrastructure remains among the most stressed sectors, accounting for 15 percent of all advances but 29.8 percent of stressed loans, as of December 2014. Five sectors -- mining, iron and steel, textiles, infrastructure and aviation -- account for more than half of bad debts. "Besides its adverse impact on banks' balance sheets, high leverage of corporates may hinder the transmission of monetary policy impulses, as corporates may not be in a position to benefit from falling interest rates due to high levels of debt," the report said.
The report also said the banking sector would need to increase cash set aside for loan losses if the economy worsened. Stress tests carried out on Indian banks showed that gross non-performing assets as a ratio to total loans could rise to 4.8 percent by September, from 4.6 percent in March.