| The report talks about the profits that banks made from their treasury operations being used to clean up their balance sheets, with the result that non-performing asset levels have come down, despite a tightening of the norms. |
| But this is history""banks have already started increasing both their deposit rates as well their interest rates on advances. Credit offtake has been rising exponentially, the incremental credit-deposit ratio is well over 100 per cent, and treasury profits have withered away. |
| It is the parts of the report that deal with the most recent trends, therefore, that are useful as guides to the future. |
| The first interesting fact is that as much as two-thirds of the recent growth in credit has been on account of retail loans. |
| In other words, corporate borrowing is yet to pick up significantly, in spite of the rise in investment demand. The reasons could be several: corporate investment intentions are yet to be translated into action; borrowing abroad has picked up substantially; corporates have plenty of spare cash, and they will go in for loans only when that is used up. |
| The RBI report does, however, say that credit needs are likely to grow, and the central bank has cautioned banks to be careful while lending, especially when there have been signs of irrational exuberance in retail lending. |
| It has also warned about the macro-economic implications of higher retail lending""which it fears may crowd out loans to corporates and infrastructure on the one hand, while increasing the indebtedness of households and affecting their ability to sustain consumption when interest rates rise. |
| Banks should heed the RBI's warning, and put in place a system of upfront automatic provisions for retail loans based on a bank's NPA record, as is the practice in some of the best banks. |
| But the concern about retail loans leading to rising indebtedness of households appears premature""Indian domestic debt levels are not yet at the level where there need to be concerns about how this will become a risk should interest rates rise. |
| The threat to corporate investment is not from retail customers as much as from the government's borrowing programme, which could crowd out private sector borrowers by driving up interest rates. But the RBI's warning to banks to ensure that corporates' unhedged foreign exchange liabilities do not get out of hand is timely, given the rush for borrowing abroad. |
| Nevertheless, it's worth noting that with the increased globalisation of the corporate sector, many companies now have dollar revenues that constitute a natural hedge. |
| Perhaps the most important part of the report lies in its analysis of the co-operative banks. The picture is one of deep crisis, with rising NPAs and the financial position of a third of these banks not considered satisfactory. |
| Co-operative banks constitute a ticking time-bomb, and it is imperative that they are reformed and restructured without delay. |
Explore Business Standard