Washington, Oct 6: Indian banks are vulnerable to further decline in profits as they face slow credit growth and elevated non-performing assets, IMF has said, calling for "additional and more timely action" to deal with the problem of bad loans.
"Banking systems are vulnerable to further declines in growth or profits, particularly in countries at later stages of the credit cycle (such as India), where slowing credit growth and risks from elevated levels of non-performing loans are most acute," said the International Monetary Fund's Global Financial Stability report.
Gross NPAs of public sector banks have surged from 5.43 per cent (Rs 2.67 lakh crore) of advances in 2014-15 to 9.32 per cent (Rs 4.76 lakh crore) in 2015-16.
IMF said bank loan-loss reserves have fallen short of the expected loss on non-performing loans under the current debt- at-risk in India It said the potential losses arising from adverse deleveraging would require additional provisions for many banking systems and the pressure is more acute in India where loan-loss reserves are low relative to potential losses.
IMF called for swift and transparent recognition of non- performing assets to ensure good health of banking system. "Some, such as India, are taking steps to reduce non- performing loans, but additional and more timely action is needed," it said.
The Indian banking sector, particularly public sector banks, have seen a sharp rise in their NPAs in the last couple of years. The Reserve Bank has already nudged lenders to set aside more funds for stressed loans and clean up their balance sheet by March 2017.
To deal with the bad loan problem, IMF has suggested that corporate insolvency frameworks should be upgraded, including by facilitating out-of-court settlement and debt-for-equity swaps, with well-defined and transparent rules. Also contingency plans to manage corporate distress should be put in place.
"This should include a timely, market-based restructuring framework that minimises moral hazard while providing for limited state support if necessary," IMF said.
Where available, banks should draw on their capital reserves to cushion losses. "But where these reserves are insufficient, policymakers will have to balance necessary prudential tightening against the risk of being excessively procyclical," IMF said.