Guard against retail asset bubble: RBI to banks

According to latest data, retail loans grew by 13 per cent year-on-year till September 16, compared with 8.7 per cent growth in overall credit. During the corresponding period of the previous year, growth in retail credit stood at 17.9 per cent.

The Reserve Bank of India has sounded early warning bells to banks, which are aggressively pushing retail credit. The central bank raised concern over the credit absorption capacity of the retail borrower and advised lenders proper monitoring.

SS Mundra, deputy governor of RBI, at an investor conference organised by Axis Capital on November 13, had said: “Many of the banks have been crowding in the retail space, trying to capitalise on demand for housing, two-wheelers and four-wheelers, white goods and so on.

"This, however, raises concerns on credit absorption level in the sector.”

“Going forward, the banks would need to put in place systems and processes to ensure adequate origination and monitoring standards and stand guard against formation of asset bubbles,” Mundra said.

According to latest data, retail loans grew by 13 per cent year-on-year till September 16, compared with 8.7 per cent growth in overall credit. During the corresponding period of the previous year, growth in retail credit stood  at 17.9 per cent.

In retail, consumer durables grew by 48 per cent on the back of 38 per cent growth in the corresponding period of the previous year.

Credit card spending went up by 17.4 per cent, compared with a mere 2.1 per cent in the year-ago period. Home loans grew 14.8 per cent, compared with 15 per cent in the year-ago period, while vehicle loans grew by 17.9 per cent as compared to 23.1 per cent.

Many large banks, mainly private sector ones, which went aggressive in retail credit, had burned their fingers during the 2008 financial crisis. Later, banks were cautious in extending retail credit but picked up momentum again in the last couple of years, as corporate credit demand remained sluggish.  

The regulator also drew attention of investors towards the issue of capital in public sector banks, which has seen their capital position deplete due to rise in bad loans.

“Going ahead, the capital position of the banks, especially the public sector banks, is likely to come under some strain, both in terms of quantity and quality,” Mundra said.

While the capital adequacy ratio for banks under Basel-III norms in March 2014 stood at a comfortable 12.9 per cent, the ratio for the PSBs was lower at around 11.38 per cent.

For private sector and foreign banks, CAR was in excess of 16 per cent.

“Notwithstanding the room available to the banks to meet the Basel-III timeline, the banks have to look to generate more internal capital.

"With the emphasis on fiscal consolidation by the government of India, the leeway earlier available to the PSBs to approach the government for additional capital will be limited and hence, one of the options for the government could be to reduce its stake in some of the PSBs,” he said.

Apart from supporting business growth, banks will need capital for higher provisioning requirements due to deterioration in asset quality, phased implementation of Basel-III capital norms.

In addition, capital will be required to cover additional risk areas under the risk-based supervision framework and likelihood of higher credit demand going forward, RBI said.

The government has estimated Rs 2.4 lakh-crore (Rs 2.4 trillion) as the equity infusion requirement for PSBs by 2019 to maintain its existing level of shareholding, which ranges from 56.26 per cent to 88.63 per cent.

On asset quality, Mundra said while the gross and net non-performing asset (NPA) numbers were not distressing, but if the restructured portfolio is added to the gross NPA (GNPA) numbers, it becomes a matter of concern.