The Reserve Bank of India (RBI) expects asset quality of banks to improve, even as it remains anxious over the sharp increase in banks’ restructured loans.
?Assuming that things do not deteriorate, the NPAs might have peaked or the asset quality might have bottomed out. The expectation is from here on asset quality should improve,? said Anand Sinha, deputy governor of RBI on Monday at a conference organised by The Assocham.
Sinha said that restructuring is an essential process that banks undertake to manage their loan portfolio and must not be viewed negatively. He added that by restructuring, banks are ensuring their non-performing assets do not rise.
?There are situations beyond control where accounts come under stress and a helping hand should be extended by banks, and that is what is restructuring all about,? he said.
In the last one year, banks have restructured a large portion of their loan portfolio as a slowing economic growth and higher input costs hit companies’ profit and put pressure on their debt repayment capacity.
According to rating agency Crisil, banks’ restructured loans are set to balloon to R2 lakh crore in 2012-13. Currently, the size of the banking system’s loan portfolio is about R46 lakh crore.
Sinha underscored the worry over the growing restructured loan portfolio and the rising bad loans of banks. He said that a rise in both bad loans and restructuring reflect the stress in the economy.
Although RBI’s stress tests show the banking system is resilient and will survive extreme stress situations, banks must curb increase in non-performing assets. Banks must proactively manage their portfolio through constant monitoring to reduce NPAs, Sinha said.
At the event, besides NPAs, the deputy governor also spoke on the need for increased surveillance of non-banking finance companies, and Basel-III norms that are set to kick in next year.
Implementation of Basel-III norms may reduce banks’ return on equity due to the higher requirement of capital, Sinha said, but this may not be significant.