Mumbai: The latest results of some retail-focused banks in India show a rise in customers of unsecured loans not repaying, and yet, some banks may not have comprehensive credit scoring and monitoring tools, rating agency Moody’s Investors Service said in a report.
“This could leave them in a difficult position if delinquency rates were to rise substantially, a scenario we have observed in other retail-booming emerging markets in Asia in the past,” the report on the country’s banking system said.
The boom in retail loans, the main driver for banks in recent years, has yet to be fully tested in a negative credit cycle, and banks should be better prepared with credit scoring and monitoring tools for closely screening risky loans, it said.
Non-performing loans of banks often exceed 10% of their shareholders’ equity and, thus, constitute a moderate-to-limited risk to solvency, said Nondas Nicolaides and Mardig Haladjian, the authors of the report. The rising interest rate scenario will hurt banks’ loan growth and gradually affect their asset quality, they added.
The recent global credit crisis and liquidity crunch has had limited impact on Indian banks, but they have been affected by the global repricing of assets, the report said.
As a result, some Indian banks had to post a notional mark-to-market loss on the derivatives they bought overseas.
ICICI Bank Ltd, the country’s second largest lender, was the worst hit. In March, the bank said its overseas branches incurred $260 million (more than Rs1,100 crore now) mark-to-market losses on account of its exposure to credit derivative products.
The derivatives involved were cross-currency options and structured products, bought by companies to protect themselves from foreign exchange risks. Mark to market is an accounting practice of assigning a value to a position held in a financial instrument, based on the current market price for that instrument.
The agency also raised concern about the ability of Indian banks in raising fresh capital to comply with Basel-II norms, an international accounting norm which calls for banks to maintain higher amount of capital for riskier asset classes. “The key concern remains the ability of the weaker PSBs (public sector banks) and small private sector banks to raise fresh capital, especially in view of the adoption of the Basel-II accord.”
On the Union government’s farm debt waiver programme, Moody’s said it did not expect this to have a significant impact on the asset quality or earnings of banks.
But, “we remain quite cautious considering some latest press articles suggesting that this farm debt plan has backfired as PSBs are gradually reporting a sharp rise in defaults by rural lenders, which hope to become eligible for the benefit, since the measure was announced,” Moody’s said.
The government had announced a Rs60,000 crore farm loan waiver programme for small and marginal farmers in the country’s annual budget, and later raised it to about Rs72,000 crore.
Moody’s said increasing competition could force all banks to adopt new products, rigorous credit culture and sophisticated management information systems.
“We hold a positive view on the increasing role that banks other than PSBs will be playing in the Indian market in the years to come,” Moody’s said.
The agency noted that public sector banks have been losing about 1% of market share annually over the past 15 years to private sector lenders.
The combined share of the assets of private and foreign banks in the 1990s was less than 10%, but it is more than 29% now, the report said.