RBI released the June 2017 issue of its monthly Bulletin. The Bulletin includes the Second Bi-monthly Monetary Policy Statement for the Year 2016-17. Speeches by the Top Management, Articles and Current Statistics. The Bulletin includes two new articles 1st- Capital Requirement for Sovereign Assets: Some Issues and Concerns; and 2nd summarising recent developments and future perspectives in global banking.
I. Capital Requirement for Sovereign Assets: Some Issues and Concerns
Going by the common understanding that sovereign exposures in local currency are default free, they have always been assigned a preferential treatment of near zero risk weight. However, post global financial crisis and particularly after Euro area crisis of 2011, highlighting the systemic risks from bank-sovereign nexus, it is this common understanding which is being questioned. The review of capital treatment for sovereign exposures of banks has been included in Basel Committee on Banking Supervision work plan during 2015 and 2016, and is now gradually seeping into discussions at other global fora like the G20, Committee on the Global Financial System and Financial stability Board. The verdict is still far from clear on the issue as there are equally strong reasons for restraining from any universal approach towards sovereign risks. For example, it is widely felt that while it is a pure EU-specific issue, any change in regulatory treatment of sovereign exposures could have significant systemic implications, especially in bank dominated financial systems like India. This article makes an attempt to present the various facets of this important issue that might end the present world of risk free assets.
II. Global Banking: Recent Developments and Future Perspectives
- Bank credit growth in Advanced Economies (AEs) showed resilience during 2016. In contrast, credit growth in major Emerging Markets and Developing Economies (EMDEs) declined or reported negative growth.
- Banks in most AEs except Spain, Portugal and Italy reported distinct improvement in asset quality. However, asset quality of banks in major EMDEs remained weak.
- Major AEs showed modest improvement in profitability. By contrast, banking systems in most EMDEs were marked by deterioration in profitability.
- Banking system of both AEs and EMDEs witnessed an improvement in the capital adequacy levels in recent years.
- A broad based recovery in bank credit growth, coupled with a declining trend in delinquency, was discernible in the United States in recent years. In the Euro Zone, there was a pickup in the balance sheet growth of banks in 2016. The credit growth to private non-financial sector turned positive.
- There was a rise in the asset share of banks from EMDEs in the top 100 global banks between 2015 and 2016.
- The global regulatory standards for banking system continued to be strengthened in 2016 reflecting increasing recognition for regulatory reforms. The policies aimed at promoting public confidence and upholding the safety and soundness of banks continued to remain in focus.
- The implementation of Basel III capital and liquidity standards generally remained timely. The implementation of higher loss absorbency and more intensive supervision with regard to Global Systemically Important Banks (G-SIBs) remained well on track.
In addition, the Bulletin also carries the second Bi-monthly Monetary Policy Statement for the Year 2017-18, Resolution of the Monetary Policy Committee (MPC), Reserve Bank of India, Speech of Shri S. S. Mundra, Deputy Governor, as also an article each on Finances of Non-Government Non-Financial Private Limited Companies, 2015-16, The Industrial Outlook Survey, 2016-17 and Inflation Expectations Survey of Households, 2016-17.
In its Current Statistics Section, the Bulletin carries datasets on ownership pattern of central and state government securities and small savings which are published every quarter.
III. Finances of Non-Government Non-Financial Private Limited Companies, 2015-16
The article analyses the financial performance of select 292,308 non-government non-financial (NGNF) private limited companies for the financial year 2015-16, based on their audited annual accounts closed during April 2015 to March 2016. These companies accounted for 32.9 per cent of the paid-up capital of all NGNF private limited companies registered with the Ministry of Corporate Affairs (MCA).
- There has been a moderation in sales growth and nominal gross value added in 2015-16 as compared with 2014-15.
- Profitability improved in 2015-16, largely on account of deceleration in operating expenses.
- The leverage ratio (ratio of long term borrowings to equity) of these companies rose further but the interest coverage ratio (ICR) improved in 2015-16 from a year ago due to higher profitability.
- Highly leveraged companies (with debt to equity ratio of more than 200 per cent or with negative net worth) had weaker debt service capacity than the rest.
- The construction sector and the real estate industry in the services sector had higher leverage in 2015-16 than in the previous year.
- The share of funds raised through bank borrowings by the sampled companies was lower in 2015-16 than in the preceding year.
- The share of funds used for fixed assets formation was higher in 2015-16.
IV. Industrial Outlook Survey, 2016-17
- Business expectations remained optimistic through 2016-17 and also improved in the first quarter of 2017-18.
- Production, order books and the overall business situation lifted business expectations while lower profit margins and the pile-up of inventory operated as drags.
- There has been a moderate improvement in pricing power in terms of selling prices; however, the cost of raw materials was expected to increase, with pessimism surrounding the outlook.
V. Inflation Expectations Survey of Households, 2016-17
The Reserve Bank’s Inflation Expectations Survey of Households (IESH) captures the inflation expectations of more than 5,000 urban households across 18 cities for three-month and one-year ahead. This article analyses the changes in households’ inflation perceptions and expectations in recent times especially focusing on the four quarters of the year 2016-17 (Q1: 2016-17 to Q4: 2016-17). The survey results are based on the responses received from the households and do not necessarily reflect the views of the Reserve Bank of India.
- Inflation expectations of households moderated during 2016-17 and most significantly in the post demonetisation period.
- Respondents expected prices to moderate in all product groups, but more prominently in respect of prices of housing and household durables.
- The inter-city disparity in inflation expectations has somewhat reduced in recent quarters.