Asset quality blues for bankers before RBI meet

Bankers continue to fret over the quality of assets, as the Reserve Bank of India (RBI) gears up to review the monetary and credit policy for 2011-12 this month. At the pre-policy meeting, in which the apex bank takes stock of liquidity conditions and credit demand, bankers said more rate increases would further hurt the repayment capabilities of borrowers.

Bankers also sought that the regulator allow the restructuring of accounts for a second time. “We have made a suggestion to consider the need for second-time restructuring for companies or units whose debt was reworked once, after the financial crisis in 2008,” said a senior banker who attended the meeting.

RBI has raised key policy rates 12 times since March 2010 to tame the persistently high inflation. It is scheduled to announce the half-yearly review of monetary and credit policy on October 25.

“Overall, there is pressure as far as asset quality is concerned,” said M D Mallya, chairman and managing director of state-owned Bank of Baroda. The repo rate, at which banks borrow from RBI, has been raised by 150 basis points, including two 50-basis point rises, since the start of the current financial year. Most banks have passed on the increase in cost to customers, leading to concern that high lending rates may result in more defaults.

An increase in non-performing assets (NPAs) would also translate into a higher need for provisioning, according to RBI norms. “The problem of NPAs and slippages is equally worrisome in case of corporates, in addition to small and medium units,” said Mallya. Pointing to the sectors under pressure, Mallya said, “One is the textile sector, which has gone into trouble because cotton prices have come down substantially. The other is the steel industry.”

The demand for credit has declined, since interest rates continued to rise. “Credit growth is muted, capex is virtually at a standstill and investment is not really happening,” K Ramakrishnan, chief executive of the Indian Banks Association, told reporters after attending the meeting.

According to RBI data, credit growth slowed from 20.6 per cent in March to 19.8 per cent in August. Ramakrishnan said banks were only disbursing past sanctions.