Transition to net zero impact on Banking sector
Transition to net zero impact on Banking sector
Subject: Economy
Section: Monetary Policy and Banking
Concept:
India is planning to reduce the carbon emission intensity of its economy by 45 percent by 2030 from 2005 levels, and achieve net zero emission by 2070.
This transition to a net-zero carbon emission target will entail adjustment in the production processes of industries that are directly or indirectly exposed to excessive use of fossil fuel according to an article in the Reserve Bank of India’s latest monthly Bulletin.
Overall impact
Three sectors with direct exposure to fossil fuels — electricity, chemicals, and automobiles — account for around 24 per cent of credit to the overall industrial sector, but only 10 percent of total outstanding non-retail bank credit, which implies a limited spillover to the banking system.
However, several other industries input intensive sector- such as cement, basic metals, paper, textiles, wood, rubber & plastic, IT & telecom, beverage & tobacco, leather, food manufacturing & processing, use fossil fuels and therefore any transition to green energy can have implications for their income and consequently their interest coverage ratio (ICR)
Transition to green energy and shifts in input mix, there could be some pressure on input costs in these sectors in the short-term, the EBITA (earnings before interest, taxes, and amortization of the representative firm could take a hit leading to worsen loan serviceability and an increase in GNPA ratio of such sectors especially industries that have low ICR, high GNPA ratio and high energy input intensity.
| Classification of Banks NPA Non Performing Assets/NPA is a loan or an advance where, -Interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan. -The account remains ‘out of order’ in respect of an Overdraft/Cash Credit (OD/CC). The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted. -The instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops. -The installment of principal or interest thereon remains overdue for one crop season for long duration crops. -The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, 2006. -In respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment. Categories of NPAs
Gross NPA is the amount obtained on adding principal and the interest on it while Net NPA is the amount obtained on deducting provisions from gross NPA. The interest coverage ratio It is a debt and profitability ratio used to determine how easily a firm can pay or cover the interest on its outstanding debt. This ratio measures how many times a company can cover its current interest payment with its available earnings. In simple terms, the interest coverage ratio of a firm is the ratio of a firm’s profit after tax to its interest expense. However, the interest coverage ratio is also expressed with respect to profit before interest and tax as well. In such cases, the interest coverage ratio is calculated by dividing a company’s earnings before interest and taxes (EBIT) by its interest expense during a given period. If a company has a low-interest coverage ratio, there’s a high chance that the company won’t be able to service its debt. This will put the firm at risk of insolvency or bankruptcy. Firms with an interest coverage ratio lower than one are unable to meet their interest obligations from their income. Such firms are categorized as ‘zombies’. |