Reddy warns banks on home loan NPAs

Reserve Bank of India Governor YV Reddy (pictured) has cautioned commercial banks against rising non-performing assets (NPAs) in their home loan portfolios with the rise in interest rates.

However, such an event is unlikely to have systemic ramifications, he said, as "the overall banking sector's exposure to housing loans being relatively small." Reddy was speaking at a seminar on the possible impact of global imbalances at the United Nations in New York.

The Indian banking sector disbursed a total of around Rs 80,000 crore of loans for home purchases in 2005-06. As on January 20, 2006, the outstanding home loans amounted to Rs 1,66,159 crore.

The total non-food credit totalled Rs 12,56,368 crore. Any abrupt adjustment in global imbalances may affect corporates, banks and households in India though the impact may be less compared with some other emerging economies, Reddy said.

If spreads widen owing to a shift in investor confidence in the international markets, corporates which have borrowed at variable rates may possibly suffer more than those which have taken loans on a fixed rate basis.

Corporates, which have hedged against currency and interest rate risks, may not be adversely affected. The Reserve Bank has been urging banks to encourage corporates to hedge their foreign currency exposures.

Further, exposure of the corporate sector as a whole to the external debt is limited by indicative ceilings on external commercial borrowings imposed by the government and the RBI. The level of total external debt of India is currently less than the foreign exchange reserves.

Although banks in India have their deposit base predominately in rupees and their investment in foreign currency assets is not large, they have been financing investment in assets, home loans and the retail market as well as equities.

Like in many emerging market economies, asset prices have risen sharply in India too. Should there be a reversal of capital flows, asset prices may decline but the banks' exposure to the risky assets have been severely restricted by RBI's regulatory actions.

Further, banks in India have invested significantly in government debt and fixed income securities. If a rise in international rates gets reflected in domestic interest rates, banks would have to mark down the value of their investment portfolio.