The Reserve Bank of India (RBI) on Thursday said “interconnectedness” among banks had risen in the last financial year and needed rigorous monitoring.
“An analysis of the network of the Indian banking system reveals that the systemic importance of the ‘most connected’ banks has increased, warranting a closer monitoring of the banks,” said RBI in its fifth Financial Stability Report, released on Thursday.
It said connectivity among Indian banks increased from 26.4 per cent in the quarter ended December 2011 to 29.1 per cent at the end of March 2012.
RBI said the degree of loss to the system due to failure of the ‘most connected’ bank had risen from 12 per cent of capital of the banking system to over 16 per cent in 2011. “Financial stability considerations, therefore, warrant that the risks posed by the increased interconnectedness of the few banks in the inner core to be carefully monitored, through rigorous microprudential supervision of these entities,” said RBI.
On asset quality, the central bank said the Indian lenders face the risk of a rise in non-performing assets, as loan restructuring was rising. “In 2011-12, the quantum of restructured accounts again increased sharply, outpacing both credit growth and the growth rate of gross NPAs,” said RBI.
Its analysis showed the need for a closer look at banks’ underlying NPA management, it said. The slippage ratio had increased to 2.1 per cent in March 2012 from 1.6 per cent a year before. Gross NPAs in the system were up to 2.9 per cent from 2.4 per cent and net NPAs were up to 1.3 per cent from 0.9 per cent in the same period. “The ratio of NPAs (net of provisions) to capital also falls short when benchmarked against the peer economies,” said RBI.
RBI also said the divergence in growth between credit and NPAs had widened in the recent period, which could put further pressure on asset quality in the near term. Credit growth in the banking sector, at 16.3 per cent in 2011-12, was lower than the 22.6 per cent recorded in 2010-11. Deposit growth was also down to 13.7 per cent from 17.7 per cent in the same period.
The central bank said the slowing in credit growth was particularly marked in the priority sectors, real estate and infrastructure segments, which together accounted for nearly 60 per cent of banking sector credit.