The Hindu Business Line : Banks have enough cushion against rate hike: Crisil

A CRISIL study indicates that even in the unpleasant scenario of rise in interest rates, banks will have little to worry about. The sizeable investment portfolio gains and the unrealised gains in their books that the scheduled commercial banks currently enjoy, provide sufficient cushion against their weak assets. This is despite the potential erosion they may suffer if and when interest rates harden.

CRISIL estimates the shortfall in capital of the banking sector after factoring in the loss due to weak assets to Rs 30,900 crore. The unrealised appreciation in investment portfolio is around Rs 63,900 crore, which indicates that there is sufficient cushion even if the quantum of appreciation declines in future due to increase in interest rates in the economy, said a press release from CRISIL.

Ms Roopa Kudva, Executive Director and Chief Rating Officer, CRISIL, said, "There is permanence to a portion of this unrealised gain, as, even if interest rates firm up, they are not expected to reach the levels that prevailed five or six years ago."

The value of the investment portfolio of the banks kept increasing with the decline of 4 per cent in bank rate over the past six years.

A large part of this appreciation, however, remains unrealised in the banks' books because of the prudential guidelines stipulated by the Reserve Bank of India.

These guidelines do not permit a bank to book the gain in the market value of the SLR portfolio until the securities are actually sold. While the extent of the actual realisation will be subject to the future interest rate environment, CRISIL believes that the time horizon of its realisation will be largely driven by the banks' need to make provisions for NPAs.

Weak assets are those where the lender has either experienced or is highly likely to experience loss of interest or principal. CRISIL's estimate of weak assets at Rs 1,32,400 crore constitutes a significant 7.8 per cent of the advances and investments of the banking sector as on March 31, 2003.

According to CRISIL, this is an improvement over the previous year, when the proportion of weak assets was 8.8 per cent.

Mr D. Thyagarajan, Director, Financial Sector Ratings, said, "The proportion of weak assets is likely to further decline over the medium term because of the structural changes and the efficiency improvement in the manufacturing sector, a more conducive policy and regulatory environment for recovery of distressed assets and the increasing proportion of retail assets in banking sector's portfolio."

CRISIL's methodology for estimating weak assets incorporates the credit quality distribution of banks' portfolios and its own default and transition data.

Assuming a recovery rate of about 30 per cent for these weak assets, the estimated losses amount to Rs 92,700 crore.

Net of outstanding provisions of Rs 31,900 crore, the impact of weak assets on the capital works out to Rs 60,800 crore.