rbi: Caveats from RBI for thriving banks

Banks are riding blistering credit growth into better health. But they would do well to heed caution set out by RBI over rising credit risk as liquidity drains out of the system. The central bank has, in its annual review of banking trends, flagged how monetary tightening could be a mixed bag for banks by improving their interest income while hurting their treasury operations as bond yields harden. Despite continuing reduction in the percentage of bad loans, the recovery process needs to be speeded up with better realisation for creditors. The risk to bank bottom lines principally arises from recovery slippage with RBI having provided an easier glide path on providing for bond portfolio losses and by ensuring liquidity remains adequately in surplus.

Public sector banks (PSBs) are funding a greater part of their credit growth through deposit mobilisation, while private lenders are resorting to relatively riskier and costlier market borrowings. State-owned banks are outperforming their private sector rivals in controlling the slippage ratio, although they are coming off a higher base in dodgy lending. And since PSBs have the biggest market share in loans, slippage for the entire industry is in control. The insolvency resolution mechanism, even with its limitations, is leading recovery. Other options available to banks either do not have a wide enough funnel or are yet to take off.

The other area of concern is the concentration building up due to banks herding loans away from industry to consumers, again, a process being led by private banks. Synchronised central bank actions have also increased risks for the global banking system through elevated borrowing costs with a poor chance of ensuring a soft landing for economies. Trade fragmentation and technology disruptions provide opportunities for banks, while making their business environment less settled. Indian banks have weathered adverse global developments of the past two years on stronger capital buffers, which will again be tested during a slowdown in the world economy.