A warning from RBI

The Reserve Bank of India has red-flagged a number of issues regarding banking, credit offtake, and global and domestic risks to the economy. But two issues that are a cause of heightened concern in its “Trends and Progress of Banking in India” and its “Fiscal Stability Report” pertain to public sector banks giving hefty dividends to the government and India Inc’s high debt. It is ironic that banks that are cash-starved and looking to the government to infuse capital are paying out huge dividends to the government. It’s like the government taking money from one pocket and putting it into the other. The RBI has come down heavily on this and 2016, it warns, will see the banks at risk from their deteriorating asset quality, low soundness and sluggish profitability.

The case of corporate India being highly leveraged and therefore in no position to make capital expenditure investments has been troubling for over a year and it is extremely worrying that the problem seems unsolvable. The corporates cannot return their loans to banks and make fresh borrowings and banks are in near-crippled condition because they cannot lend or don’t want further risks and non-productive assets. The RBI has called for closer monitoring of the threat to banks from corporates with weak balance sheets. Whilst this is for the future, the issue of what’s to be done with their current debt needs tackling.

The report, whilst acknowledging the strong fundamentals at the macro level, prods the government to focus on structural reforms and improve ease of doing business to attract capital, imperative to maintaining a balanced current account deficit.