July 08, 2019 I BFSI Research

Summary of RBI’s Financial The Financial Stability Report of the RBI presents a contemporary picture
Stability Report - June 2019 of the Banking and Financial Services sector which is going through
challenging times. This report summarises the performance of the SCBs,
NBFCs and HFCs, based on RBI’s Financial Stability Report of Jun-19,
Contact: providing a summary of the performance of the entities during FY19. RBI’s
Sanjay Agarwal
Senior Director assessment of large HFCs/NBFCs indicates that a failure of these large
sanjay.agarwal@careratings.com entities could potentially cause contagion losses, comparable to losses
+91-22- 6754 3582
caused by the failure of larger banks, underscoring the need for greater
Author monitoring of these entities.
Purnima M. Nair
Research Analyst The Scheduled Commercial Banks (SCBs) posted double digit credit
purnima.nair@careratings.com
+91-22-6837 4405
growth and a near double digit deposit growth in Mar-19. The
performance of SCBs has improved in Mar-19 on account of a marked
decline in the provisions (-3.5% Y-o-Y Growth) and a simultaneous
Inputs
improvement in Net Interest Income (16.5%). Growth in the operating
Mitul Budhbhatti expenses (13.1%) curtailed the overall profits of the SCBs. The marked
Associate Director- Corporate Ratings
mitul.budhbatti@careratings.com
decline in the GNPA ratios across bank types indicate that the NPA cycle
91-22-6754 3547 is now turning.

Saurabh Bhalerao GNPA ratio of the industrial sector has improved during the year. Mining
Associate Director- Industry Insights
Saurabh.bhalerao@careratings.com and Quarrying and Base Metals sub-sectors continue to have greater
91-022-6837 4425 stressed assets ratio at the end of FY19. The combined share of these
sectors in the total credit to industry stood at 12.9%. Among the sub-
Mradul Mishra (Media Contact) sectors within industry, stressed advances ratios of all major sectors
mradul.mishra@careratings.com declined in March 2019 as compared to September 2018
91-22-6837 4424
The performance of NBFCs has been impinged by a moderation in the
growth of their loans and advances and thereby has affected their profit
margins. The report states that share of NBFCs in the credit to the
commercial sector in FY19 was at 26.6 per cent of the aggregate
domestic sources, indicating that a significant part of credit flows to the
commercial sector, was through the NBFCs. In FY18 the share of NBFCs in
commercial credit stood at 39.1%, showing a declining trend in FY19
Disclaimer: This report is prepared by CARE Ratings Ltd. CARE
Ratings has taken utmost care to ensure accuracy and
relative to FY18.
objectivity while developing this report based on information
available in public domain. However, neither the accuracy nor
completeness of information contained in this report is
guaranteed. CARE Ratings is not responsible for any errors or
omissions in analysis/inferences/views or for results obtained
from the use of information contained in this report and
especially states that CARE Ratings has no financial liability
whatsoever to the user of this report
 Industry Research I Summary of RBI’s Financial Stability Report – June 2019

Scheduled Commercial Bank (SCBs)

- Credit growth (Y-o-Y) in PSBs improved from 6.3% in Mar-18 to 9.6% in Mar-19 (Table 1). Credit growth in private banks
(PVBs) has sustained at above 20% level since Mar-18. In Mar-19, PVBs registered 21% credit growth while public sector
banks (PSBs) recorded 9.6% growth in credit. The growth in deployment of SCB’s credit comes on account of improved asset
quality and a decline in their GNPA ratio. The SCBs have taken up the credit space left by the NBFCs owing to the latter’s
moderation in disbursements in FY19.

- Deposit growth of SCB’s recorded sustained improvement rising from 6.9% in Mar-18 to 8.7% in Sep-18 to 9.9% in Mar-19.
Deposit growth of PVBs in Mar-19 stood at the same level (~18%) as on Mar-18. PSBs recorded an improvement in deposit
growth from 3.3% in mar-18 to 6.5% in Mar-19.

- The Net Interest Margin (NIM) stood at the 2.8% in Mar-19, approximately similar to 2.7% as of Mar-18. Net Interest income
(NII) comprised around 70% of the SCB’s operating income in Mar-19 as compared to 65% share in Mar-18, owing to 16.5%
growth in the NII in Mar-19.

- The Return on Assets (RoA) of PSBs continues to be negative at (-)0.9% as compared with 1.2% of PVBs as of Mar-19. The
RoA of SCBs overall stood at (-)0.1% for the same period, owing to the negative RoA of PSBs.

- The GNPA ratio has improved considerably as it came down from 11.6% in Mar-18 to 9.3% in Mar-19. The improvement is
largely attributed to the decline in the growth of GNPA during FY19. The report projects the GNPA ratio of SCBs to further
decline to 9% by Mar-20. While PSBs continue to record a higher GNPA ratio of 12.6% as compared to PVBs at 37% as of Mar-
19. The report projects that the GNPA ratios among PSBs’ may decline to 12.0 % by Mar-20, whereas PVBs’ GNPA ratios may
decline to 3.2% and that of FBs may come down from 3.0 % in Mar-19 to 2.9% in Mar-20.

- The Provision Coverage Ratio of (PCR) of SCBs stood at 60.6% in Mar-19 as compared with 52.4% in Sep-18 and 48.1% in
Mar-18. The PSBs recorded a higher PCR at 60.8% than 57% recorded by the PVBs, in Mar-19.

- Capital to Risk-weighted Assets Ratio (CRAR) shows broader improvement in asset quality as it rose from 13.8% in Mar-18 to
14.3% in Mar-19 for SCBs. CAR for PSBs stood at 12.2% while that of PVBs was 16.3% as of Mar-19. The report states that as
many as five SCBs may have CRAR below the minimum regulatory level of 9% by March 2020 without taking into account any
further planned recapitalisation by the government.
Table 1: Financial Performance of SCBs (%)
Mar-18 Sep-18 Mar-19
Financial Performance
PSB PVB SCB PSB PVB SCB PSB PVB SCB
Credit Growth (Y-o-Y) 6.3 21.3 10.4 9.1 22.5 13.1 9.6 21 13.2
Deposit Growth (Y-o-Y) 3.3 17.7 6.9 5 18.4 8.7 6.5 17.5 9.9
Ratios
NIM - - 2.7 2.4 3.5 2.8 2.38 3.8 2.8
RoA -0.9 1.3 -0.2 -0.7 1.2 -0.004 -0.9 1.2 -0.1
GNPA Ratio 15.6 4 11.6 14.8 3.8 10.8 12.6 3.7 9.3
PCR 47.1 51 48.1 51.4 56.2 52.4 60.8 57 60.6
CRAR 11.7 16.4 13.8 11.3 16.5 13.7 12.2 16.3 14.3
Source: RBI

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 Industry Research I Summary of RBI’s Financial Stability Report – June 2019

Stressed Assets

- Large borrowers comprising over 50% share of the SCBs’ credit, contribute to 82% of the GNPAs. The share of the large
borrowers to GNPA stood at 85% as of Mar-18.

- Looking at sectoral GNPA, the agriculture sector GNPA stood at 8.5% on Mar-19 as compared with 7% reported in Mar-18.
Industrial sector reported 17.5% GNPA Ratio in Mar-19 as compared with 22.8% GNPA ratio in Mar-18. Services and Retail
sector reported 5.7% and 1.8% GNPA in Mar-19 as compared with 6% and 2% reported in Mar-18, respectively.

- Amongst the credit to the Industrial sector, 2 of the 13 sub-sectors reported a stressed assets ratio of above 25% - namely
the Mining and Quarrying and the Basic Metals Sector. Their respective share to total industrial credit stood at 1.4% and
11.5% as of Mar-19.

- Infrastructure continues to hold the highest share of credit to industry at 35%. The sub-sectors’ stressed advances ratio
stood at 17.8% as on Mar-19 lower than 22.1% recorded in Mar-18.

Table 2: Sector-wise share in Industrial Credit and Stressed Advances Ratio of SCBs (%)
Mar-18 Sep-18 Mar-19
% Share in Stressed % Share in Stressed % Share in Stressed
Sub- Sectors within Industry
Total Credit Advances Total Credit Advances Total Credit Advances
to Industry Ratio* to Industry Ratio* to Industry Ratio*
Mining and Quarrying 1.2 26.8 1.5 29.7 1.4 26.7
Food Processing 5.7 22.3 5.3 21.4 5.3 17.6
Textiles 7.3 22.3 6.9 18.7 6.5 16.1
Paper and Paper Products 1.2 28 1.1 21.1 1.1 16.9
Chemicals and their Products 6.2 8.8 6.5 10.7 6.9 8.5
Rubber Plastic and their Products 1.5 5.2 1.6 9.6 1.6 9.2
Cement and their products 2 18.1 1.8 18.3 1.8 14.2
Basic Metal and their Products 14.4 46.3 12.7 34.2 11.5 28.5
Engineering 5.8 34.4 5.7 28.3 5.7 25
Vehicles, Parts and Transport
2.9 22.5 3.1 23 3.1 18.4
Equipment
Gems and Jewellery 3.8 25.4 2.8 24.9 2.7 21.5
Construction 3.8 24 3.9 25.6 3.7 21.8
Infrastructure 34.1 22.6 35.5 20.1 36.4 17.8
*Stressed loans as a per cent of advances of their respective sector
Source: RBI

Non-Banking Financial Services (NBFCs)

- The NBFC loans grew 18.6% during FY19 albeit at a lower rate compared to 21% in FY18. The borrowings growth for the both
the periods stood at 19.1%. The loan growth for FY19 was largely funded through debt vis-à-vis equity as the leverage ratio
peaked to 4% by Sep-18 as compared with 3.2% in Mar-18 and later, came down to 3.4% by Mar-19, as borrowing became
difficult and CP/NCD market shrunk. . Growth in reserves of NBFCs moderated from 19.6% in Mar-18 to 14.6% in Mar-19,
while the share capital growth stood at 6.3% in Mar-19 as compared with 6% in Mar-18. The size of the NBFCs balance sheet
grew by 20.6% as of Mar-19 compared with 17.9% growth recorded in Mar-18.

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 Industry Research I Summary of RBI’s Financial Stability Report – June 2019

- The total income and expenditure, both grew at 17.8% in Mar-19 as compared with 11.4% and 9.6% growth in Mar-18
respectively. The net profit growth of NBFCs moderated substantially as it went down from 27.5% growth in Mar-18 to 15.3%
growth in Mar-19. The slowdown in the profits comes majorly on account of moderation in the loan disbursement.

- The ratio of capital market exposure to total assets moderated from 10.5% in Mar-18 to 9.5% in Mar-19. The exposure of real
estate to total assets has declined marginally from 6.7% to 6%, during the same period, indicating that the NBFCs have taken
measures to bring down their exposure to the sector.

- The leverage ratio (Debt to Equity) stood at 3.4% as on Mar-19, compared with 3.2% on Mar-18. The leverage ratio had risen
to 4% in Sep-19. The ratio of net profit to total income rose only marginally from 14.1% in Mar-18 to 15.3% in Mar-19. This
profit ratio has however moderated as compared with the Sep-19 level of 16.5%, indicating that the moderation in the
disbursements of NBFCs ensued in the second half of FY19.

- The RoA of NBFCs has largely been at the same level at 1.7% for both Mar-18 and Mar-19. The GNPA Ratio has risen from
5.8% in Mar-18 to 6.6% in Mar-19. The performance of the NBFCs has been further affected by a decline in their CRAR level
from 22.8% in Mar-18 to 19.3% in Mar-19. The stress tests’ results for individual NBFCs given in the report indicate that
around 8% of the companies will not be able to comply with the minimum regulatory capital requirements of 15%.

Table 3: Major Financial Indicators of NBFC (Y-o-Y Growth %)

Balance Sheet Particulars Mar-18 Sep-18 Mar-19
Share Capital 6.0 5.8 6.3
Reserves and surplus 18.7 17.5 14.6
Total borrowings 19.6 17.2 19.6
Total Liabilities / Assets 17.9 17.2 20.6
Loans and advances 21.1 16.3 18.6
Income/Expenditure Particulars
Total income 11.4 16.7 17.8
Total expenditure 9.6 16.2 17.8
Net profit 27.5 16.2 15.3
Ratios
Capital market exposure to total assets 10.5 7 9.5
Real estate exposure to total assets 6.7 5.9 6
Leverage ratio 3.2 4 3.4
Net profit to total income 14.1 16.5 15.3
RoA 1.7 1.8 1.7
GNPA 5.8 6.1 6.6
CRAR 22.8 21 19.3
Source: RBI

The borrowing mix of NBFCs has changed as the entities have recorded a rise in their share of borrowings through banks i.e.
29.2% of their total borrowings in Mar-19 as compared with 23.6% in Mar-18. The share of borrowings from debentures
stood at 47.4% in Mar-18 as compared 41.5% as of Mar-19. Share of borrowings from Commercial Paper (CP) declined from
8.5% in Mar-18 to 7.6% in Mar-19.

As can be seen from Table 4, post the liquidity crunch in the CP market, the absolute issuance of CPs by NBFCs has declined
sharply during H2FY19 as compared with FY18 and H1FY19. During the period, CP spread of all entities had increased,

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 Industry Research I Summary of RBI’s Financial Stability Report – June 2019

particularly that of NBFCs, indicating heightened risk perception from investors. Subsequently, the CP spread for NBFCs has
reduced and its gap vis-à-vis other issuers has narrowed. Thus the NBFC sector was brought under greater market discipline
in H2FY19. This is evident as the better performing companies continued to raise funds while those with ALM and/or asset
quality concerns were subjected to higher borrowing costs.

The report states that 49.9% of the NBFCs gross payables are to SCBs, 28.3% are to AMC-Mutual Funds (MFs) and 17.5% to
insurance companies, as of Mar-19. In Mar-18, 32.4% of the gross payables were to AMC-MFs, 43.5% to SCBs and 19.5% to
insurance companies, indicating that MFs have reduced their exposure to NBFCs considerably during FY19.

Table 4: Borrowing mix of NBFCs (% Share of borrowings)

% Share in Total Borrowings Mar-18 Jun-18 Sep-18 Dec-18 Mar-19
Debentures 47.4 45.3 42.4 42.1 41.5
Commercial Papers (CP) 8.5 9.8 9.5 8.1 7.6
Bank Borrowings 23.6 24 27.7 28.1 29.2
Others 20.5 20.9 20.4 21.7 21.7
Source: RBI

Housing Finance Companies (HFCs)

The HFCs have been in the focus for quite a few months, for their profile of liabilities and assets. The FSR states that the
relative proportion of bank lines in HFCs’ liability structures increased over the past one year. The share of HFCs’ bank
borrowings stood at 28.9% in Mar-19 as compared with 23.9% in Mar-18. The share of CPs has, however, come down from
10.8% in Mar-18 to 7.5% in Mar-19, indicating that the HFCs have either found it difficult to raise funds through the short
term paper during the course of last fiscal or have consciously decided to reduce their dependence on this source. The share
of NCDs in the HFCs’ borrowings stood at 44.4% in Mar-19 as compared with 46.2% in Mar-18. The report states that
dependence on bank lines is not a sustainable funding proposition for HFCs in the housing finance market for competitive
reasons i.e. borrowing costs for HFCs from Banks is higher than that of the debt market. Dependence on banking lines may
lead to adverse selection in the mortgage portfolios, which banks’ too compete. Hence, HFCs would have to restructure their
exposure to non-mortgage loans, in order to improve their asset quality and further improve their ALM levels in order to
reinforce confidence in the debt market.

The SCBs hold 42.1% share in the gross payables of HFCs, followed by AMC-MFs at 27.3% and insurance companies at 19.6%
as of Mar-19. The All India Finance Institutions (AIFIs) hold 7.1% share in the HFCs gross payables. The share of MFs stood at
32.3% as of Mar-18, while that of SCBs stood at 38.5% for the same period.

Table 5: Borrowing mix of HFCs (% Share of borrowings)

Particulars Mar-18 Mar-19
Non-Convertible Debentures (NCDs) 46.2 44.4
Banks /NHB/Term Loans 23.9 28.9
Public Deposits 11.1 11.4
Commercial Paper (CP) 10.8 7.5
ECBs, Other FCBs 2.9 3.3
Others 5.1 4.5
Source: RBI

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 Industry Research I Summary of RBI’s Financial Stability Report – June 2019

CARE View: Challenges to look forward??

 PSBs continue to make losses and even as the NPA cycle might be turning, the RBI’s new framework for stressed asset
resolution and older NPAs could still lead to more provisioning and higher credit costs. Consequently, the main challenge
will be for PSBs to raise capital either in the market or through higher allocations from the Centre.
 PSB bank mergers talk is likely to gain more attention this year. Further, addressing issues of NPAs will be important this
year.
 Given the recent guidelines of the National Housing Bank, the reduction in the borrowing limits would reinforce
discipline amongst HFCs, while an increase in the minimum CAR level would strengthen their balance sheets. Maintaining
the revised CAR level as well as addressing their ALM mismatches would ensure better performance of the HFCs in the
coming months.

The NBFCs will look to change the risk perception of the investors. Implementing the RBI’s Liquidity Risk Management
Framework would bring about better discipline amongst the entities. The framework would ensure that the NBFCs move
away from their earlier business model of borrowing short and lending long, as the draft framework requires them to
maintain sustainable ALM to meet their liquidity requirements during uncertain times.

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