Raghuram Rajan raises bad loan worries as financial sector faces higher risk

Raising concerns over the rising level of bad loans in Indian banks once again, Reserve Bank of India governor Raghuram Rajan feels weak corporates with lower debt-servicing capacity may only worsen the situation.

The concern is more over the financials of public sector banks, the worst among the lenders in terms of bad loans and capital.

Rajan has, in the Financial Stability Development Council (FSDC) report, said that corporate sector vulnerabilities and the impact of their weak balance sheets on the financial system need closer monitoring.

The report has called for an early passage of the bankruptcy bill to protect bank assets.

"In the face of mounting potential losses, an early clearance of the proposed Insolvency and Bankruptcy Bill will also play an important role," the RBI said.

The report said that RBI's banking stability indicator shows that risks to the banking sector have increased since the publication of the previous financial stability report due to rising bad loans and sluggish profits.

Notably, public sector banks continued to record the highest level of stressed assets at 14.1% of their loans as against 4.6% for private banks and 3.4% for foreign banks. Stressed assets include bad loans (gross non-performing assets) and restructured assets (loans where stressed borrowers have been given more time to meet obligations).

Five sub-sectors — mining, iron & steel, textiles, infrastructure and aviation — together constituted 24.2% of the total loans of banks and account for 53% of stressed advances. Stressed advances in the aviation industry rose to 61% in June 2015 from 58.9% in March, while stressed advances of the infrastructure sector increased to 24% from 22.9%.

While observing that India is better placed compared to emerging market peers due to lower commodity prices and prudent policy measures, the RBI has said that the government needs to factor in future Fed action and developments in China in policymaking.