The risks to India’s banking sector increased in the three months ended March due to a cash crunch and a decline in the asset quality, the central bank said.
“Tight liquidity, deteriorating asset quality and reducing soundness are the major contributors to the decline in stability of the banking system,” the Reserve Bank of India said in its Financial Stability Report published on it’s website today. “Macro tests indicate that if the current macro economic conditions persist the credit quality of commercial banks could deteriorate further.”
The slowest economic expansion in a decade and the highest borrowing costs among major Asian economies pushed bad loans at the Indian lenders to 3.6 percent of the total at the end of September before easing to 3.4 percent in March, data from the central bank showed. Soured debt may rise to 4.4 percent by March 2014 under a severe stress scenario, the Reserve Bank said in the report.
The current capital adequacy ratio of lenders will be enough to cover any rise in the bad loans, the central bank said. Banks will need capital infusion of 5 trillion rupees ($83 billion) to comply with the Basel III rules that will be fully implemented in India by March 31, 2018, according to the report.