Report of the committee on financial sector assessment.
Indian banks – both public sector and private – are facing some pressure due to global developments. But stress tests on the Indian banking system revealed that the global meltdown is unlikely to affect any of the key parameters in a significant way.
Although the committee on financial sector assessment pointed out that off-balance sheet (OBS) exposure was one risk that banks needed to deal with.
Compared with the total assets, OBS was estimated at 356 per cent in September 2008, as against 364 per cent in March 2008. While there was a decline in the case of new private banks (from 311.3 per cent to 286.9 per cent) and foreign banks (from over 3,000 per cent to over 2,500 per cent), an increase was witnessed in the case of public sector players (from 57.8 per cent to 60 per cent) and old private sector banks from 56.8 per cent to 63.9 per cent).
| HEALTH CHECK RESULT |
| * Technology and peer pressure have pushed up productivity, which is higher for private and foreign banks. The cost to income ratio has dropped from 61.2 in March 2000 to 48.9 at the end of 2007-08 |
| * Capital adequacy ratio is comfortable at above 12% with old private banks showing significant improvement |
| * NPAs have declined from 7.1% (net) in 1999-2000 to 1.1 in March 2008 |
| * Fresh asset slippage is declining |
| * At 1%, return on assets compares with the global average |
| * Return on equity was at 12.5% at the end of 2007-08, as against 12.7% in 1999-2000 |
While Indian banks cleared the credit risk tests as their capital position would be able to see them deal with shocks of higher bad debt, there were some concerns on lending below the benchmark prime lending rate. During the year-ended March 2008, 76 per cent of the loans were disbursed below the BPLR, as against 27.7 per cent in March 2002.
Another sore point was liquidity risk arising out of dependence on high-cost bulk deposits and lending based on inter-bank lending. At the same time, there has been a shortening of residual maturities, leading to a higher asset-liability mismatch, the report said.
“While the reliance on bulk deposits has come down in recent months, more attention on monitoring and supervision of purchased liquidity may be needed,” said RBI Deputy Governor Rakesh Mohan. The committee, headed by Mohan, suggested that the central bank could consider a specific regulatory capital charge if the bank’s dependence on purchased liquidity exceeded a defined threshold.
On market risk, however, the committee concluded that banks have been managing their interest rate risk by reducing the duration of their portfolios, which had dropped from 14 per cent in March 2006 to 8 per cent at the end of the last financial year.
While banks cleared the stress tests overall, the committee said that risk management, exposure to related parties and market risk were areas where regulator attention was required.
So far this year, analysis of the data, the committee said, does not show too many reasons to worry.
Between March and September 2008, the capital adequacy ratio has shown a marginal decline across all bank groups. For scheduled commercial banks as a whole, the capital adequacy ratio fell from 13 per cent at the end of March 2008 to 12.5 per cent in September, but continued to be higher than the regulatory prescription of 12 per cent. Besides, banks have sufficient headroom to raise capital.
While at the systemic level, the non-performing assets have remained intact, some increase has been seen case of old private and foreign banks, resulting in more provisioning requirement. “While increased provisioning has not impacted profitability very significantly for the first half of 2008-09, it could impact the banks’ profitability going forward,” the report said.
With banks going slow on paring lending rates, there has been an increase in the net interest margin.
