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| RBI cautions banks on clients' foreign currency exposure |
| BS Reporter / Mumbai Aug 25, 2010, 00:12 IST |
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The Reserve Bank of India (RBI) has asked commercial banks to carefully assess risks of unhedged foreign currency exposure of their corporate clients.
In its annual report for 2009-10, the central bank said some bank borrowers could be affected due to adverse exchange rate movements. However, it did not expected delinquency from restructured assets to increase significantly.
In 2008, RBI had allowed banks to treat restructured assets as standard assets, a one-time leeway given to the banks during the global financial crisis. According to RBI data, restructured advances constituted three per cent of the total gross loans, as on March 31.
The central bank has also cautioned commercial banks regarding the decline in profitability and asset quality. “The economic slowdown led to deceleration in the growth of the balance sheet of the banking system. This could have a lagged effect on credit quality and profitability. Asset quality could be impacted to some extent if there are slippages in some of the accounts which were restructured under the special dispensation,” RBI said.
“While the resilience of the commercial banks to credit and interest rate shock has improved over time, the liquidity scenario analysis shows some potential risk. The margins of the banks might face pressure from market to market impact on the investment portfolio, increased provisioning requirement and calculation of savings rate interest on daily basis,” the Reserve Bank of India (RBI) said in its annual report.
Rising yields on government bonds is on the rise amidst tight liquidity conditions coupled with the central bank’s efforts to tighten monetary policy to tackle inflation.
RBI has asked banks to make higher provisions for non-performing assets and to reach a provisioning coverage ratio of 70 per cent by September this year. Although most banks have reached the RBI mandated norms, big players like ICICI Bank and State Bank of India has asked for an extension.
RBI officials said the bank will not extend the time frame for all the banks but will consider specific requests.
The central bank has also pitched for an alternative source for funding infrastructure as the gap between the asset liability portfolio of banks are widening.
According to RBI data, bank credit to the infrastructure sector witnessed an annual compound growth of 48.6 per cent during the last ten years, and the share of bank finance to infrastructure in gross bank credit increased from about 2 per cent to more than 12 per cent during the corresponding period.
“While banks continue to be a prime source of financing for infrastructure projects, alternative non-banking financing has to be attracted with appropriate policies, to be able to address the financing constraint to growth in infrastructure” RBI said.
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