Despite the slew of measures taken by the Reserve Bank of India (RBI) in recent weeks, bankers said on Thursday that liquidity still remains a major cause of concern for the industry, and the coming quarters could witness a significant rise in non-performing assets (NPAs).
According to the bankers, a robust risk management system, adequate capital infusion, and regulatory reforms would be crucial to ensure India’s economic growth would be intact in the medium and long term.
“The recent turmoil has been caused due to massive leveraging, greed and innovation without proper risk-taking abilities. Despite the crisis, India continues to grow at 7.9 per cent. Liquidity is a big issue on Thursday. There is not enough liquidity for flow from one bank to another. We also need to develop the corporate bond market,” said O P Bhatt, Chairman, State Bank of India, on the sidelines of a seminar organised by the Federation of Indian Chambers of Commerce and Industry (FICCI) and Indian Banks’ association (IBA).
The banks are currently facing immense liquidity pressure both domestically and globally, as resources gradually disappeared from the system with the onset of the financial meltdown. Banks have also been unwilling to lend each other in the international markets.
Emphasising the need for liquidity, ICICI Bank Joint Managing Director Chanda Kochhar said, “We need funds to fill the gap arising from absence of trade credit and global liquidity. Resources are also needed to keep up India’s growth and investments. Liquidity impacts the interest rates prevailing in the system. Source of funding from the capital market is also not available.”
Kochhar, however, cautioned that India is not completely decoupled from the global crisis, as the domestic financial institutions have also enhanced global resources over the past few years.
“We will see higher NPAs in the coming days with Indian financial institutions, due to their credit derivative, counterparty and concentration risks. NPAs should rise across the sector. Statistically, it is inevitable that NPAs would go up as the asset growth of the banking industry has been over 30 per cent in the last four years,” added Bhatt.
Commenting on rising NPAs, Kochhar said, “Lending standards in India is different from those in the US. Here, banks lend against the borrowers’ income, whereas in the US, the banks lend against assets. Indian banks operate at a much lower leveraged level, almost half as compared to their global counterparts. Also, one-third of Indian banks’ assets are parked in government securities, which reduces liabilities and risk.”
Addressing the seminar, Bhatt said, “India’s future is extremely bullish in the medium to long term, but we need to revisit the regulations and balance the agricultural and infrastructural growth to ensure a continued growth of over 7.9 per cent. Much of India’s growth will depend on infrastructure developments, which requires an investment of about $500 billion in the next five years.”
Citibank’s CEO for India and South Asia, Sanjay Nayar, expects the uncertainty to continue for some more time, but says Asia would remain somewhat ring-fenced. “We have to shift our deposit and asset profiles to address the crisis. We have to tackle the assets-liability mismatch, and avoid mis-pricing of credit-related risks. We need long-term structural liquidity for which capitalisation of banks is essential,” he said.
There is need for a short-term foreign currency market, and the government may need to re-capitalise the banks. Significant export and domestic demand will, however, drive India’s growth,” Nayar added.
