The Reserve Bank of India (RBI) said that GST and Demonetization could transform the economy. RBI asked banks to provide additional working capital limit to medium, small and micro enterprises (MSMEs) to deal with cash crunch.
On the corporate sector, the RBI said the performance of industry had improved, though the risk of a lower turnover remained. On the performance of the financial sector, it said business growth for banks remained subdued. Public sector lenders continued to lag their private-sector peers, with profit contracting in the first half of 2016-17.
At 9.1% in September, against 7.8% in March 2016, banks’ bad loans were pushing overall stressed advances ratio to 12.3% from 11.5%. Financial system remained stable, although banks, particularly PSBs, continued to face significant levels of stress.
These observations were made in the Report on Trend and Progress of Banking in India 2015-16 (RTP). It was also added to the 14th issue of the Financial Stability Report (FSR).
RBI Governor Urjit Patel said the withdrawal of Rs 500/1000 notes will impart far reaching changes going forward.
RBI further said that the banking stability indicator shows that the risks to the banking sector remained elevated. Main reasons were continuous deterioration in asset quality, low profitability and liquidity.
The business growth of banks remained subdued with public sector banks (PSBs) continuing to lag their private sector peers. System level profit after tax (PAT) contracted on y-o-y basis in the first half of 2016-17.
It also sais that the large borrowers registered significant deterioration in their asset quality.
In this context, the governor said that there are various regulatory changes underway globally to strengthen financial stability. At the same time, Patel said that the global financial crisis has prompted regulators to require banks to undertake stress tests. These were required to see if their risk appetite matches their risk taking capacity. The asset quality review of Indian banks and the subsequent corrective actions are steps in this direction.