RBI Governor D Subbarao today said higher-than-expected rate hike of 50 basis points could have an adverse impact on the asset quality of banks but asserted that it would not pose any systemic risk as of now.
Quoting bankers, who met him after the credit policy this morning, the Reserve Bank Governor said at post-policy press conference, "They [bankers] told us that the NPA [situation] can come under stress especially in some interest-rate sensitive sectors."
However, he was quick to add that the deterioration is not systemic. "It is our understanding that there would be no systemic risks," the governor asserted.
With today's hike, the 11th since March 2010, the central bank has increased its key rates by a cumulative 3.25 percentage points in its effort to tame the uncomfortably high headline inflation which stood at 9.44% in June.
The rising interest rates and increasing commodity prices which affect input costs, coupled with a general sense of a slowdown in economic growth are widely believed to hurt businesses.
The bankers told the monetary authority that the rising interest rate regime would increase the risk of bad loans in the system.
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The nation's largest lender State Bank of India Chairman Pratip Chaudhuri concurred saying, "there are signs of pressure on asset quality."
All the bankers have told RBI that the policy rate hike transmission will be "rapid", the Governor said. It means that the rate hikes will start pinching borrowers sooner than they have so far.
Public sector banks like Bank of India and Union Bank of India have reported a fall in profit for the first quarter on higher NPAs. The country's largest lender State Bank of India had seen a 99% erosion in net profit for Q4 of FY11 to a little over Rs 20 crore due to bad assets and higher pension provisioning.
Bank of Baroda CMD MD Mallya, who also heads the industry body Indian Banks Association, said rate-sensitive sectors like real estate, infrastructure and auto can see some impact following today's 50 bps hike.
Union Bank CMD MV Nair too said those companies which are leveraged and have high debt on its books, and small and medium enterprises may report some stress going ahead.
The SBI chairman said education loans can also see some stress building up, while HDFC Bank MD Aditya Puri echoed Subbarao's reaction, asking the media not to blow up the issue as it is not a systemic risk.
As a solution, many of the companies are already looking towards external borrowings, Chaudhuri said, adding that such clients typically ask SBI for a guarantee while tapping the cheap money from the developed world, where propelled by economic stimulus, lending rates are at an all time low.
RBI Governor said, "Those corporates who can access external borrowings will do so. But we should also recognise that there are limits on how much ECB [external commercial borrowings] will come in, restrictions on end-use of ECB, interest rate caps...So those restrictions will ensure we will not have a flood of ECBs."
On the crisis in the realty sector in the National Capital Region, following the court rulings to stop the ongoing property development in the Greater Noida/Nodia Extension area, Subbarao said he has not received any representation from any bank so far.