Wednesday, October 5, 2011

Asset quality blues for bankers before RBI meet


SOURCE :BS Reporter / Mumbai October 05, 2011, 0:47 IST


Bankers continue to fret over the quality of assets, as the Reserve Bank of India (RBI)
 gears up to review the monetary and credit policy for 2011-12 this month.

 At the pre-policy meeting, in which the apex bank takes stock of liquidity conditions and credit demand, bankers said more rate increases would further hurt the repayment capabilities of borrowers.

Bankers also sought that the regulator allow the restructuring of accounts for a second time. “We have made a suggestion to consider the need for second-time restructuring for companies or units whose debt was reworked once, after the financial crisis in 2008,” said a senior banker who attended the meeting.





RBI has raised key policy rates 12 times since March 2010 to tame the persistently high inflation. It is scheduled to announce the half-yearly review of monetary and credit policy on October 25.



“Overall, there is pressure as far as asset quality is concerned,” said M D Mallya, chairman and managing director of state-owned Bank of Baroda. The repo rate, at which banks borrow from RBI, has been raised by 150 basis points, including two 50-basis point rises, since the start of the current financial year. Most banks have passed on the increase in cost to customers, leading to concern that high lending rates may result in more defaults.


An increase in non-performing assets (NPAs) would also translate into a higher need for provisioning, according to RBI norms.


 “The problem of NPAs and slippages is equally worrisome in case of corporates, in addition to small and medium units,” said Mallya. Pointing to the sectors under pressure, Mallya said, “One is the textile sector, which has gone into trouble because cotton prices have come down substantially. The other is the steel industry.”


The demand for credit has declined, since interest rates continued to rise.


 “Credit growth is muted, capex is virtually at a standstill and investment is not really happening,” K Ramakrishnan, chief executive of the Indian Banks Association, told reporters after attending the meeting.


According to RBI data, credit growth slowed from 20.6 per cent in March to 19.8 per cent in August. Ramakrishnan said banks were only disbursing past sanctions.

Indian Banks: Healthy, But Precarious








Source :Forbes India: Pravin Palande : Oct 4, 2011


Indian banks have brought bad loans down to 2.4 percent over 10 years, but now they need to be careful



The past three months have been tough for Indian banking.

 High interest rates and threats of a global recession have taken their toll on bank stocks. The NSE banking index fell 15 percent compared with the Nifty’s 11 percent slide in the past three months. Indian banks, ironically, have never been in a better state of health in the past 10 years.

A recent study by Boston Consulting Group (BCG) found that bad loans fell from a peak of 11.4 percent in 2001 to just 2.4 percent in 2010, showing the efficiency of management of capital.





 In fact, Indian banks have been performing better in controlling defaults with only 0.6 percent of loans handed out last year turning sticky, compared to 1 percent in the US and China. Indian banks also have a cost-to-income ratio of 47 percent, which is lower than Germany, France and the US. 
mg_57182_npa_banking_280x210.jpg

The main reason for the robustness was the banks’ focus on return on investment, cost-to-income ratios and the efficient use of technology. BCG expects that by 2025 the Indian banking sector will be the third largest in the world on assets, behind China and the US.

But now stress signals are showing up. The Reserve Bank of India expects non-performing assets (NPA) to inch up to 2.9 percent during 2011. IDFC Securities, a broking firm, recently said at least 17 percent of loans are stressed and some could go bad.



 Total bank credit to the industrial sector stands at about Rs. 17,60,600 crore.

“Credit to power and infrastructure sectors has grown 40 percent in the past four years and the proportion of the same has gone up to 14 percent in terms of total credit offtake, which has created additional risks to the banking segment,” says Ajay Parmar, head of institutional research at Emkay Global.

State-owned banks have a higher allocation to small industries, which could get hurt early if there is an industrial slowdown. 



Additionally, the central bank’s battle with persistent inflation is raising the cost of money, pressuring net interest margins that are expected to continue to narrow for at least another two years.

But no one is pressing the panic button yet because there is no dearth of liquidity in the system. Says Rajeev Thakkar, CEO, Parag Parikh Financial Advisory Services, “If margins are high then NPAs are not a cause for concern... There is a difficulty in the system but we are certainly not into recessionary territory.”