Banking regulator warns of worsening asset quality, flow of credit

The Reserve Bank of India (RBI) has warned that the asset quality continued to pose some concerns as the growth in non-performing assets (NPAs) outstripped growth in advances, leading to a deterioration of gross NPA ratios.

However, the RBI’s second Financial Stability Report (FSR) also said the financial sector in India remained stress-free notwithstanding intermittent volatility, especially in equity and foreign exchange markets. “This is also displayed by the Financial Stress Indicator for India, which was introduced in the first FSR. Financial institutions remained healthy, credit offtake has picked up, as has profitability, especially in the first half of 2010-11,” the RBI said. The Banking Stability Index points to a healthy improvement in the stability of the banking sector over the past few years. This is corroborated by the results of a range of stress tests undertaken by the RBI, the second FSR said, after assessing the health of India's financial sector.

“These (NPA) ratios deteriorated despite increased write offs and one time settlements. Doubtful and loss assets comprised over 50 per cent of the stock of NPAs indicating the preponderance of sticky advances. Recently, some concerns had arisen in respect of real estate firms allegedly involved in the loan syndication bribery case and the fallout of investigations in regard to issuance of 2G telecom licenses on bank exposures to telecom companies,” the FSR said.

Detailed enquiries have been undertaken though preliminary findings do not point to widespread irregularities or systemic concerns, it said. However, there could be a potential impact on the flow of credit to these sectors as banks adopt a more cautious approach to lending to these segments of the economy, the RBI warned.

Some deterioration in the capital position of banks is evidenced only in case of a very sharp increase from the current NPA levels. Some issues in the financial market microstructure will need to be addressed, it said. “Asset quality of banks and their asset-liability management position continue to warrant monitoring. Regulatory gaps in the non-banking financial sector will need to be plugged. A robust macro prudential framework for identification of systemic risks will need to be set up,” it said.

On the real estate sector, the RBI said, “though the share of credit flowing to real estate has remained stable, the NPAs in real estate sector recorded a rise, thereby underlining the need for more intensive monitoring. The real estate NPAs showed increase of 8 per cent during the quarter ended September 2010.” As against their share of about 60 per cent in the total real estate loans, the residential mortgage NPAs contributed nearly 80 per cent of real estate NPAs as at end September 2010. NPAs in residential mortgages increased on a year on year basis as at end September 2010. However, the gross NPA ratio remained unchanged at about 2.5 per cent.

Source: The Indian Express Limited

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