Wednesday, June 15, 2011
Financial health seems fine
The Reserve Bank of India came out today with its health check report for the country’s financial sector — the third in the past 12 months — and pronounced that it was in fine fettle but admitted there were some wobbles ahead for the economy.
The report said the economy faced downside risks from a slowdown in global recovery, high oil and commodity prices, and sovereign debt problems in the Euro area and a decline in domestic investment demand.
However, it added that the Indian financial system was stable despite some fragility in the global macro-financial environment.
For the banking sector which has been witnessing a hike in key interest rates because of stubborn inflation, the report said that increasing interest rates, hike in the savings account rate, amortisation of pension and gratuity liabilities and potentially enhanced provisioning requirements for non performing assets might impact their profitability.
The report also raised some caution on the structure of bank’s loan books. Though the credit portfolio of commercial banks was diversified across industries, geography and sectors, the report said that during the last few years, incremental credit growth was observed to be mainly propelled by credit growth in a few sectors — retail, commercial real estate and infrastructure.
In March 2011, these sectors accounted for 19 per cent, 4 per cent and 13 per cent, respectively of the gross advances of banks and the combined contribution of the three sectors to the incremental gross outstanding credit was to the extent of 40 per cent.
“Each of these sectors were characterized by unique asset quality features and, given their large share in credit portfolio of banks, required careful monitoring,” the report noted.
On real estate loans, which registered a growth of 24.6 per cent in 2010-11, more than the overall credit growth of 22.6 per cent, the financial stability report said the sector posed some concerns given the large and growing share of these loans in the credit portfolio of banks. “Going forward, the asset quality in this segment may come under further pressure given the increasing interest rate environment. There is also some anecdotal evidence of increasing inventory levels in the sector even as prices continued to remain elevated,” it observed.
Banks have also been told to monitor the rise in growth of retail loans. Here the worry is that bad loans in this category could rise as interest rates keep rising. “The robust rebound in retail loans witnessed during recent quarters warrants close monitoring as the asset quality of such loans could come under pressure given the increasing interest rate environment. The performances of these loans are closely linked to the individual income and wealth levels, which could be affected if the risks to economic growth were to materialise,” the report said.
Admitting that the elevated inflation and interest rate may also impact the balance sheet of financial entities, the report said the central bank needed to manage the volatility in the liquidity situation in the financial system which had been in a deficit mode for almost a year.
Burning Fuels
Oil minister Jaipal Reddy today pressed for a hike in diesel and domestic LPG cylinder prices before Prime Minister Manmohan Singh.
PSU retailers Indian Oil, BPCL and HPCL were suffering daily revenue losses of Rs 450 crore, and officials said the oil ministry was lobbying for a hike of at least Rs 3-5 per litre in diesel and Rs 25-50 per LPG cylinder.
Reddy’s meeting comes a day after the CAG criticised the oil ministry’s role in approving Reliance Industries’ KG-D6 field cost. The oil minister briefed the Prime Minister about his ministry’s stand on the CAG’s draft report.
While Reddy refused to comment on his 15-minute meeting with the Prime Minister, officials said the meeting was fixed much before the CAG submitted its draft report on June 8.
Reddy’s meeting today with the Prime Minister was on fuel prices.
The oil minister had last week met Mukherjee to push for a fuel price hike. Oil companies are losing Rs 14.22 on the sale of every litre of diesel. In addition, they lose Rs 27.47 on a litre of kerosene and Rs 381.14 per 14.2-kg domestic LPG cylinder.
The three firms may end the fiscal with a revenue loss of Rs 160,568 crore, at least half of which will have to be met by the government from its budget. The rates for the three products were last hiked in June 2010, when crude was ruling at $72 per barrel.
The basket of crude India buys averaged $110 a barrel this month.
The CAG report alleged that the oil ministry bent the rules to allow Reliance Industries to benefit at the cost of the government’s own financial stake in the development of the country’s largest gas fields in 2004-06.
Reliance is developing the D-6 gas field in the Krishna-Godavari basin.
The report by the Comptroller and Auditor General (CAG) states that the company revised the costs of developing the field by more than $6 billion.
“However, at this stage, based on the information provided, we are unable to comment on the reasonableness, or otherwise, of the increase in cost, both overall and in respect of individual line items,” the CAG said.
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