Clipped from: https://www.thehindubusinessline.com/opinion/editorial/excessive-risk-taking-by-banks-needs-to-be-checked/article67028063.ece
There are several red flags in certain categories. With credit offtake by industry slowing down, retail loans now account for one-third of total bank loans
The June edition of the RBI’s Financial Stability Report has struck a positive note, highlighting that the Indian financial sector is better placed than the US and Europe with ‘twin balance sheet advantage’ for growth. The strong growth in bank credit, expanding margins and decrease in bad loan provisions have ensured that there are sufficient capital buffers to withstand moderate to severe adverse macroeconomic conditions.
The health of the banking sector appears rosy with gross non-performing assets ratio at a 10-year low of 3.9 per cent, provision cover for risky assets improving to 74 per cent and capital to risk-weighted assets ratio at 17.1 per cent in March 2023. But it would not be right to get complacent based on these numbers. It may be recalled that the RBI Governor and other RBI officials had recently pointed out that lending institutions are ‘evergreening’ their loan book to hide the growing NPAs. If this is correct, then the assumptions made in the Financial Stability Report about a robust banking system may not be quite right. Two, the transmission of the 250 basis points increase in repo rate since last May is not yet complete; increase in interest rates on outstanding loans was just 104 basis points while the increase in rates of fresh rupee loans was only slightly higher, at 157 basis points, until April 2023. With over two-thirds of total bank loans of 14 of the largest banks linked to floating-rates, rates are likely to move higher in the coming months, impacting borrowers.
There are also several red flags in certain categories. With credit offtake by industry slowing down, retail loans now account for one-third of total bank loans. Of concern is the fact that 74.8 per cent of these loans are unsecured. It is also seen that almost one-tenth of the retail accounts were not meeting their payment obligations on time. Unsecured loans such as credit card loans of public sector banks, where the GNPA ratio had risen to 18 per cent in March 2023, and education loans with a GNPA ratio of 5.8 per cent could be potential problem areas going ahead. Advances to the MSME sector also need close monitoring with 18.8 per cent of these accounts turning into non-performing assets as of March 2023. The stress is more among micro and small business accounts.
The central bank needs to check banks from taking excessive risks to chase business growth. Banks should not hound retail borrowers with offers for personal, credit card and other retail loans, given the greater risk in these loans. While the report talks about growing reach and greater inclusivity due to digital lending fintechs, these entities are also bringing a set of lower-rated borrowers to the banking system. Lower-rated borrowers accounted for 45.7 per cent of originations in the consumer credit category. While improvement in financial inclusion is welcome, the proliferation and camouflaging of stress in these accounts should be avoided.
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