Slow economic growth may hurt banks' asset quality, says Pranab

Says sufficient cushion available to absorb higher capital requirements under Basel III

The slowdown in economic growth might hamper banks’ asset quality but the government was committed to infusing capital in public sector banks, finance minister Pranab Mukherjee said on Saturday.

“Going forward, if GDP growth slows down, there could be some downstream impact on asset quality,” Mukherjee said at a seminar organised by the Indian Merchants’ Chamber here.

Economic growth during 2011-12 slowed to 6.9 per cent from 8.4 per cent a year ago. The growth for the current fiscal has been pegged at 7.6 per cent.

“At the same time, additional capital will have to be raised to meet the requirements of implementing Basel III, the needs of a growing economy and for meeting the objectives of financial inclusion,” Mukherjee said.

In his Budget for 2012-13, Mukherjee provided for a capital support of Rs 15,888 crore to public sector banks and financial institutions.

The government infused more than Rs 20,000 crore in state-owned banks in 2010-11 while Rs 12,000 crore was infused last financial year to ensure banks’ tier-I capital adequacy stayed above eight per cent, compared to the regulatory requirement of six per cent. Overall, banks have to maintain a capital adequacy ratio of nine per cent.

The minister said sufficient cushion was available with banks to absorb the enhancement in the equity and tier-I capital requirements under Basel III. “The government is committed to ensuring the requisite level of capitalisation of public sector banks,” he added.

High interest rates and lower economic growth have impacted the repayment capacities of borrowers, pushing up the NPAs (non-performing assets) of banks to Rs 1.27 lakh crore in the first nine months of financial year 2011-12. Banks’ bad loans stood at Rs 94,084 crore in 2010-11, Rs 81,813 crore in 2009-10 and Rs 68,220 crore in 2008-09.

Quoting the financial stability report of the Reserve Bank of India (RBI), Mukherjee said though there had been some deterioration in financial soundness indicators yet capital adequacy remained well above the regulatory requirements and asset quality indicators continued to compare favourably with ratios in peer countries.

Banks may not cap gold loans

Banks are unlikely to limit gold loans to individual borrowers, the RBI has indicated. Last month, it capped the gold loan exposure of non-banking finance companies (NBFCs) by imposing a 60 per cent limit. That meant NBFCs primarily involved in gold loans could not lend more than 60 per cent of the value of gold pledged with them.

“NBFCs have a high concentration of gold loans, which banks don’t,” said RBI deputy governor Anand Sinha. He clarified the regulation was not for all NBFCs, but for those which had more than 50 per cent of their portfolio in gold.

20% loans recast may turn NPAs

While there are concerns among investors about high slippages from restructured assets impacting banks’ profitability, the RBI has indicated the situation is not all that ‘bad’. Sinha said the amount of restructured assets slipping into the non-performing asset category was likely to be contained at 20 per cent. “That is not bad. It means 80 per cent assets will be standard,” he said.