RBI: NPAs hit monetary policy transmission in India: RBI report–Economic Times–06.05.2018

Bad loans have impaired monetary policy transmission in India as banks were unable to increase their lending rates and protect net interest margins (NIMs) amid a broad deterioration in asset quality between 2013 and 2017, a central bank research paper said on Wednesday.

“When the gross NPA ratio was high and rising, banks were not able to protect their NIMs as in a competitive environment, there are limits up to which banks can charge extra credit risk premia. NIMs of public sector banks, which had large NPA/stressed assets, were negatively impacted, while NIMs of private sector and foreign banks were not,” the paper authored by Joice John, Arghya Kusum Mitra, Janak Raj and Deba Prasad Rath said.

NIMs are the difference between the yield a bank earns on loans and that it pays on deposits. The paper is titled ‘Asset Quality and Monetary Transmission in India. ‘Although not the official view of the Reserve Bank of India (RBI), these occasional research papers authored by RBI officials are a good indicator of the thinking within the central bank.

The set of four papers released on Wednesday includes one authored by Monetary Policy Committee (MPC) member and RBI executive director Michael Patra. Two MPC members Pami Dua and Chetan Ghate are also on the advisory board.

The paper says that as gross NPAs for banks rose, they were unable to increase interest rates due to competitive pressures. Gross NPAs of scheduled commercial banks increased from 3.4% of advances in March 2013 to 4.7% in March 2015 and further to 9.9% by March 2017. By contrast, bank NIMs, after increasing to 2.9% in 2010-11 from 2.2% in 2009-10, declined to 2.5% in 2016-17.

“The analysis suggests that credit risk, proxied separately by the gross NPA and stressed asset ratios, had a positive impact on the NIMs of scheduled commercial banks for the period Q1, FY11 to Q1, FY18, implying that deterioration in asset quality impaired monetary transmission,” the researchers said. Banks were unable to increase NIMs because interest income could no longer be recognised, competitive pressures refrained banks from loading extra credit risk premium, and credit growth slowed down sharply from 18.3% in Q1, FY11 to 9.2% in Q1, FY16 and further to 5.9% in Q1, FY18.

“Large NPAs on the one hand and a sharp decline in credit volumes on the other possibly resulted in the coefficient of size turning statistically insignificant. This also impacted NIMs of banks,” the research paper said.

via RBI: NPAs hit monetary policy transmission in India: RBI report

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