Spike in bad loans worries RBI

TNN | Dec 23, 2011, 03.57AM IST

MUMBAI: Bad loan growth in Indian banks this year has been over thrice the average growth in the preceding five years. While most bad loans are in retail, priority sector and infrastructure, RBI is worried about the power sector which is going through a high level of stress.

RBI on Thursday released its Financial Stability Report, which assess the ability of the financial sector to survive various types of stress. The stress test results show that bad loans will reduce bank profits and may also force some of them to raise capital. Besides rising bad loans, the financial system could come under stress because of a falling rupee and fleeing foreign investors.

RBI's stress test shows that if bad loans were to increase 150%, 20 banks representing 46% of bank lending in India would be forced to seek capital support as their core capital adequacy would fall below the prescribed 6%. Considering that gross non-performing assets of banks were at 2.01% in March 2011, a 150% increase would translate to a gross NPA ratio of 5.02%.


"If GDP growth slows down, there could be some downstream impact on asset quality. At the same time, additional capital will need to be raised due to the compulsions of implementation of Basel III, a growing (albeit at a potentially decelerated rate) economy and financial inclusion," the RBI report said.

The central bank's warning comes at a time when the country's largest lender State Bank of India is awaiting capital infusion from the government to bring its tier-one capital adequacy to over 8%. However, SBI will not be among those whose capital will be impaired even in the worst case scenario for bad loans.

According to RBI, slippages (good loans that have turned bad) has outpaced credit growth and have grown 92.8% (year on year) as on end-September 2011. Although the share of infrastructure is relatively lower than retail or priority sector loans, RBI has warned that there is high level of impairments and restructuring in power. "With losses among state electricity boards and coal supply issues faced power projects, high concentration of bank credit in power generation is a matter of concern," RBI said.

Margins of public sector banks will be the worst affected if they respond to competitive pressures from their private peers on savings account rates.

RBI's observation comes at a time when private sector lender Yes Bank has taken the rate war further by hiking its savings deposit rate to 7% from 6% earlier. Most large banks continue to offer 4% while some banks with lower share of current and savings account such as Kotak Bank are offering 6%.

According to RBI calculations, PSU banks will see their margins shrink by over 22 basis points as against private banks whose margins will shrink by only 15-17 basis points. RBI has said that after deregulation of the savings rate, some churn in customers can be expected. But for PSU's it is a difficult situation as they stand to lose more than private banks if they raise deposit rates.

While falling interest rates may ease the pressure, banks are seeing a rate war in the non-resident external (rupee) deposits. On Thursday, HDFC Bank increased its NRE deposit rates by over 2.5 times to 9%.