Money & Banking

Banks’ return on equity will come under pressure: RBI

| Updated on: Nov 06, 2011
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Deputy Governor asks banks to be cautious about real estate credit

The Reserve Bank of India has called upon banks to raise the levels of productivity of its human and technology resources, especially as a means of protecting their return on equity ratios, which would come under pressure with higher mandatory capital infusion.

Delivering the valedictory address at Bancon 2011, the RBI's Deputy Governor, Mr Anand Sinha, noted that the transition of the Indian banking system to the Basel-III norms of capital requirements would be smooth. But, he warned, Basel-III would require banks to bring in more capital than now as a relative to its loans, causing ‘return on equity' to come under pressure.

“How are you going to find investors?” Mr Sinha asked.

While the higher capital requirements would bring down risks in the banking sector and eventually investors would recognise the lower risks and be willing to invest, he said, in the short term the answer is only raising productivity.

Mr Sinha also expressed concern over the growing stock of non-performing assets in the system. He said that while gross NPAs have been coming down as a proportion of total advances, the stock of NPA (in value terms) has been going up. He noted that between 2006 and 2010 the stock of NPAs grew by 63 per cent.

“Because of good profitability we have been able to manage it by keeping our net NPAs at respectable levels. But the fact is, it is kind of putting a lid on garbage,” Mr Sinha said.

While stressing that NPAs was “not a systemic issue”, he noted that the build up of fresh NPAs have been greater than recoveries in the recent times, “even after heavy write-offs”.

“We need to tone up our credit management, contain slippage, recover more and get rid of the NPA stock,” he said.

The Deputy Governor also expressed concern over long-term loans, as in the case of housing loans, being offered at floating rates. “Just as un-hedged foreign currency exposure is dangerous,” he said, calling for more fixed rate products.

Mr Sinha observed that over time the demand for housing and real estate would increase and would be another driver for banks' credit portfolio. “Real estate has brought down many banking systems in many countries — so we have to be cautious,” he warned.

Mr Sinha said that the RBI was working on “what do to SLR” in case a bank is under liquidity stress. “We have to find a way out,” he added.

Published on November 06, 2011

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