With the RBI wielding the sledgehammer on inflation, asset quality of banks faces a greater risk of deterioration because of lending to sectors that are vulnerable to rising interest rates and slower economic growth.
With the Reserve Bank of India (RBI) wielding the sledgehammer on inflation, asset quality of banks faces a greater risk of deterioration because of lending to sectors that are vulnerable to rising interest rates and slower economic growth.
These include commercial real estate, non-banking finance companies (NBFCs), housing loans, vehicle loans, education loans and the power sector.
State Bank of India chairman Pratip Chaudhuri said, “NPA accretion is accelerated in sectors where interest rates comprise a significant part of the total cost”
Such loans, he said, are given for real estate, education and automobiles.
Bank of India chairman and managing director M D Mallya said even the infrastructure can be categorised as sensitive to interest rates.
Bankers on Tuesday told Reserve Bank of India governor Duvvuri Subbarao that assets or loans could come under stress in rate sensitive sector due to the rapid rate hike.
Banks with a higher exposure to housing loans in the retail segment are seen hurting.
“If you are hiking the equated monthly instalments, or EMIs, every time, then how far will the customer be able to repay the loan? The other option is to extend the loan re-payment period. But there also you have restrictions on extending the period,” said PN Ramaswami, general manager, Bank of India.
He said that Bank of India’s housing loans portfolio is very small so the bank does not run such a risk.
Ramaswami also said banks where the proportion of restructured
loans in commercial real estate is large and repayment is yet to begin will be vulnerable to asset quality deterioration.
For non-banking finance companies, the concern stems from the fact that they are not able to pass on the impact of higher cost of funds to customers.
That automatically makes loan repayments difficult.
Reuters adds: State-owned banks in India account for about 70% of total loans.
Most Indian banks, which posted earnings for the June quarter this month, have shown a decline in net interest margins — a key gauge of profitability for banks — either on sequential or on year-on-year basis.
Although lenders do not expect a ‘substantial’ impact on margins going forward, there could be a compression of 5-10 basis points, Aditya Puri, managing director of HDFC Bank, said.
“Banks may not fear to pass on the interest rate and they might not go for aggressive deposit mobilisation. So margins may not compress significantly from these levels,” said a senior analyst at a local brokerage who did not wish to be named.
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