India Inc's debt servicing capacity are much below the 2008-09 levels, the Reserve Bank of India (RBI) said in its financial stability report released on Friday.
The corporate sector's interest coverage ratio, which reflects the ability to service loans, has fallen, with real estate firms having the highest interest burden in the last four years. Interest expenditure is also on the rise in sectors such as textiles, iron and steel, and construction.
Interest expenditure as a percentage of sales was 3.6 per cent in 2011-12 - the highest in nine years.
RBI said this, coupled with non-performing assets (NPAs) outpacing credit growth and lower level of provisions, was likely to dent banks' profitability in the coming quarter. Loans that is not serviced for more than 90 days are classified as NPAs and banks have to make provisions for these.
According to the central bank, gross NPA for all banks rose sharply to 3.6 per cent of advances as in end-September, from 2.9 per cent six months ago, while net NPA ratio increased to 1.7 per cent of advances from 1.2 per cent. The share of public sector banks in NPA and debt restructuring was higher. "The growth rate of gross NPAs at 45.7 per cent (year-on-year) as in end-September 2012 outpaced that of gross advances during the same period, highlighting the rising concerns on asset quality," RBI said.
Credit growth was 17 per cent as on September. The central bank also noted that banks' provisioning coverage ratio steadily declined during the last few quarters, despite a rise in NPAs, which has helped the banks report higher profit. "In view of this, it may be advisable for banks to increase their provisioning levels," RBI told the banks.
Between March 2009 and March 2012, total gross advances of the banking system grew by less than 20 per cent (compound annual growth rate).
But the restructured standard advances grew by over 40 per cent.
Another area of concern was the restructuring of advances, particularly big-ticket loans, which recorded a steep rise in number and value.
RBI data showed that while total gross advances of the banking system grew by less than 20 per cent (compound annual growth rate) between March 2009 and March 2012, restructured standard advances grew by over 40 per cent.
The proportion of restructured standard advances to gross total advances increased from 3.5 per cent in March 2011 to 4.7 per cent in March 2012 and further to 5.9 per cent on September end. "It is a fact that restructuring of advances across the banking sector has increased during the current financial year as also during the last financial year. This is a matter of concern," RBI said.
Another area of concern was the unhedged exposure of Indian corporate sector. RBI said a significant portion of foreign exchange exposures remained unhedged in the recent period.
"This is especially disquieting, given that the exchange rate volatility has been higher in India in comparison to other emerging market currencies as well as those of advanced economies," the central bank added.