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ShareThe Reserve Bank of India (RBI), in its second quarter review of the monetary policy, has taken measures to curtail systemic liquidity, maintain stability in the financial system, and move ahead with its agenda for developing the financial markets. These steps are expected to strengthen the Indian financial sector over the long term.
However, over the near term, though the liquidity-related measures will not impact the banking sector as the liquidity remains ample, provisioning related steps can materially affect the profitability of the banking sector.
Although RBI has kept its benchmark interest rates unchanged, it has increased the statutory liquidity ratio (SLR) marginally, back to25%.
The central bank also stipulated a need to maintain the cash reserve ratio on collateralised borrowing and lending obligations, and discontinued some refinance facilities introduced in 2008, indicating that it remains cautious on the liquidity front.
These measures should help balance inflationary concerns while ensuring that growth is not hindered, and that the cost of credit remains low.
The liquidity-related measures will not have any material impact on the banking industry, given the existing comfortable liquidity position as reflected in the current SLR holdings of scheduled commercial banks, at nearly 28%, and low utilisation of the refinance facilities.
To maintain stability in the financial sector, the RBI has stipulated norms for minimum provisioning coverage ratio for non-performing assets for banks, a specified a lock-in period and minimum retention for securitised assets, increased provisioning for real-estate exposures, and proposed regulations for non-convertible debentures with a maturity of less than a year.
Following the recent re-introduction of interest rate futures, RBI has also sought to develop the financial markets, through the introduction of plain vanilla credit default swaps and indicated a timeframe for the launch of Separate Trading of Registered Interest and Principal Securities (STRIPS).
The central bank has also permitted greater coverage in currency hedging beyond the US dollar -- rupee currency futures, permitted banks to build up capital for take-out exposures, linked risk weights for banks' exposures to infrastructure non-banking financial companies with their credit ratings, and has indicated its intent to introduce modern techniques of interest rate risk measurement such as duration gap analysis.
These measures will help develop the Indian financial markets over the long term. For the banking sector, however, the need to maintain the stipulated provisioning coverage ratio of 70% could adversely impact profitability in the near term.
Based on the reported non-performing assets as on March 31, 2009, Crisil sees the need to build substantial additional provision, as the existing provisioning cover of the banking system is only around 50%.
Further, the measure to specify a minimum lock-in period (of one year before assets can be securitised) and retention (of at least 10% of the assets securitised) may affect the single-loan collateralised debt obligations markets, where banks are relatively active.
(The writer is senior director, Crisil Ratings.)
