'Rate cut breather for asset quality of banks'

Challenges remain with stressed borrowers in low-growth sectors

The repo rate cut has signalled a change in the rate cycle and the effect of the Reserve Bank of India’s action will ease pressure on the asset quality of banks, especially public sector ones, according to rating agency Moody’s.

The extended rate tightening trend had posed risks to asset quality by pushing banks to increase lending rates. It meant moderation in demand and hit corporate borrowers’ ability to repay loans, Moody’s said. The outcome of an unfavourable economic environment and higher interest costs led to increasing non-performing loans (NPLs) and restructured loans. These asset quality pressures were particularly visible among public sector banks.

 

State Bank of India, Bank of India, Union Bank of India and Central Bank of India witnessed more NPLs and restructured assets than the industry average. While the pressure on asset quality may ease, corporate borrowers and industries that have a problem paying loans amid weakening economic growth will pose a challenge, Moody’s said. On the liability side, banks are challenged by depositors’ preference for higher yielding non-bank saving vehicles.
 

ASSET QUALITY
	Mar ‘09	Mar ‘10	Mar ‘11*	Dec ‘11**
Restructured loans (Rs bn)	604	978	1,069	1,827
Recast loans as  percentage of gross loans	2.16	2.99	2.66	4.40
Gross NPAs as  percentage of gross loans	2.44	2.50	2.35	2.80
Source : * RBI, ** Moody’s estimate

Vineet Gupta, vice-president-senior analyst, Moody’s, said RBI’s changed policy stance was a marked shift to economic stimulation from inflation fighting. The moves that paved the way for policy easing and greater access to liquidity are credit-positive because they support banks at a time of increasing asset quality and liquidity pressure.

The shift follows two years of monetary policy tightening and a 375 basis points increase in repo rate. It pushed the repo rate to 8.5 per cent in October 2011 from 4.75 per cent in March 2010.

RBI doubled the amount of liquidity available via the discount window to two per cent of deposits. It will ease pressure on banks that have had to pay higher rates to obtain liquidity. It also indicated RBI was pro-actively supporting banks, Moody’s added.