Monday, December 30, 2013
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The Reserve Bank of India has
said the risks of banking sector have seen a surge for the last 6 months because
of increasing bad loans. RBI has advised restricting banks’ exposure limit for
single borrower and single group. It also adds that consistently high retail
inflation makes it hard to dip down the rates.
The half-yearly Financial Stability Report
(FSR) showed individuals and single group’s controlling stock exchanges amidst
the scam in the National Spot Exchange. RBI is concerned over the bad loans in
infrastructure, iron and steel, textiles, aviation and mining. On the positive
side, RBI said that the delay in US tapering off its fiscal stimulus has helped
India. The report said that India is likely to have a current account deficit
of below 3% in FY14 and is now prepared for tapering of the fiscal stimulus in
the US.
RBI's stress tests
show that if bad loans double from September 2013 levels, it would be enough to
wipe out over 14.3% of bank capital. The subsequent contagion effect — where
losses in one entity cause other lenders to lose money — would cause an
additional 26.8% erosion of capital. In all, 40.1% of the banking industry's
capital would be lost if NPAs were to increase 100%, RBI said. Similarly, other
stress tests show that banks would lose over 50% of their capital if interest
rates were to rise by 250 basis points.
But despite the risks that
high rates pose to banks and to the economic growth, RBI said that cutting
interest rates was difficult because of high inflation. "Even as some
moderation is expected in food inflation going forward, persistence of retail
inflation remains a concern," RBI said.
The FSR — the first
in governor Raghuram Rajan's regime — highlights need for new limits on how
much a banks can lend to one company or one business group. RBI has pointed out
that the International Monetary Fund and the World Bank had assessed India to
be "materially non-compliant" vis-a-vis the Basel norms related to
large exposure limits in their report on the financial sector assessment
programme (FSAP). The FSAP report said, "The large exposure limit of 40 %
— which can exceptionally be brought to 50 % for infrastructure exposures — for
a group borrower, is significantly higher than the large exposure limits of 25%
which is considered good international practice... this limit has the potential
to allow the default of one particular consolidated borrower to cause a serious
loss of capital in a banking company." In this context, RBI said "A
review of the extant single and group borrower exposure limits would
considerably enhance the stability of the banking sector."
Commenting on the NSEL
crisis, the report said, "Investigations into the various malpractices at
NSEL have revealed the need for comprehensively addressing the problems in
commodity spot markets in India." The report also cautions against
individuals or groups controlling a stock exchange. "The episode has
emphasized the need for ensuring that no single shareholder or a group of
shareholders is permitted to dominate the functioning of the exchange or
exercise management control," the report said.
Compared to the
earlier FSR released in August by former RBI governor D Subbarao, the current
version is substantially positive on the external front. In August, Subbarao
had said that the key challenge then was to finance the high current account
deficit (4.9% in Q1FY14) in a non-disruptive manner and contain its size within
sustainable levels. This time, however, RBI has said that there have been
substantial improvements on the external front with exports growing much faster
than imports. "From July 2013 onwards, exports have grown faster than
imports. The CAD is expected to be less than 3% of GDP in FY14. The increased
resilience of the Indian financial markets is evidenced by the positive
reaction to the announcement of the commencement of tapering from January 2014 by
the Fed," the report said.
ZyFin Research states that a score of above 50 suggests optimism while below 50 is pessimism.
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