Banks need to watch asset quality: RBI

Banks need to watch asset quality: RBI

Mumbai: Indian banks need to step up efforts to resolve their bad loans and tighten credit risk management systems, the Reserve Bank of India (RBI) said in its annual report on banking on Monday, days after rating agency Moody’s downgraded the country’s banking sector outlook on similar concerns.

The asset quality of banks need to be closely watched in the changing interest rate environment as the sticky loan portfolio of small and medium enterprises might rise, the central bank said in its Report On Trend and Progress Of Banking In India for 2010-11.

Last week, Moody’s Investor Service downgraded its outlook for India’s banking system to “negative" from “stable", as it warned of slowing growth at home and overseas hitting asset quality, capitalization and profitability.

However, its rival Standard & Poor’s (S&P) Ratings Services revised upwards India’s banking industry country risk assessment (BICRA) to group ‘5´ from group ‘6´ on Friday, making it part of a group of countries including China, Portugal, Thailand and Turkey.

Some large state-run banks including the country’s top lender State Bank of India (SBI) and Bank of India have spooked investors with a sharp jump in net non-performing assets in the September-quarter.

The RBI said the high pace of lending to the infrastructure sector by state-run banks could raise risks of increased delinquencies in the future, while slippage in incrementally high growth loan portfolios in sensitive sectors like retail and real estate may impact profitability.

India’s industrial output grew at its slowest pace in two years in September, providing further evidence of deceleration in the economy and raising the odds of a pause in the central bank’s 20-month-long policy tightening cycle.

The RBI has been among the most aggressive central banks globally, increasing its interest rate 13 times since March 2010.

Savings Rate Deregulation

The deregulation of savings bank deposit rate may not be disruptive for Indian banks though initially it could lead to some competition, the RBI said.

Last month, the RBI deregulated savings deposit rates, its last administered bank rate, in a move that will expose such accounts to policy rates changes and push up the cost of funds for banks, sending shares in the industry lower.

“Banks with low share of savings deposits may like to garner a larger share of such deposits. However, this process may not be disruptive," the RBI said on the deregulation.

While smaller and newer banks like Yes Bank and Kotak Mahindra Bank have already raised their saving bank rate by as much as 200 basis points from the previously mandated 4%, the country’s top lender State Bank of India said it was “not in a hurry" to increase rates.

The report also said stress tests suggested the Indian banking sector remained fairly well capitalised and resilient to asset quality shocks and other likely adverse changes in macroeconomic environment.

The report said that Indian banks should increase their global presence.

“In the rapidly changing global financial landscape, it is imperative for the Indian banks to think global but act local," it said.