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With high exposure to sectors such as power, housing and textiles negatively impacting the asset quality of banks and lending institutions, the Reserve Bank of India has increased its vigil on the lenders focused on these areas.
The reasons cited by the central bank for doing so include certain structural issues specific to these sectors, which have been compounded by the changing interest rate environment and signs of an impending downturn.
Apart from the risks of asset quality deterioration in infrastructure sectors such as power, lenders have been asked to watch out for an increase in the sticky loan portfolio of SMEs (small and medium enterprises).
A senior executive with a state-owned lending firm said the central bank has advocated caution for lenders at large in the coming months.
Already, investors in the power sector have started to apply the brakes on funding of new private generation projects amid concerns over adequate coal supplies for new projects.
Power problems
There are also signs that developers of power projects close to commissioning could default on their loan repayments due to fuel shortage.
A crash in merchant power rates and reluctance among cash-strapped State Electricity Boards to buy power from the spot market are adding to investor worries.
The textiles sector is also in the doldrums on account of structural issues, including restrictions on cotton yarn exports, fluctuation in fibre and yarn prices and accumulation of stocks, both of fibre and yarn.
In the power sector, as a large amount of bank finance is locked in, the RBI has emphasised on the need to sort out the fuel issues expeditiously.
The focus is on ensuring that new plants are able to secure input supplies so that they start off in time with a reasonable load factor.
The textile industry has already petitioned the Government for a comprehensive relief package to tackle the losses suffered by the industry in recent months. CITI, the industry association, has already met the Chairmen of IDBI and Exim Bank and senior officials of the State Bank of India to stress on the need for some relief from the banking sector.
According to RBI data, while overall trends in non-performing assets (NPAs) do not indicate any systemic vulnerability as yet, the gross NPA ratio of scheduled commercial banks increased marginally to 2.52 per cent by end-June 2011 from 2.35 per cent at end-March 2011.
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