The Reserve Bank of India (RBI) has noted that managing the government?s gross record market borrowing programme of Rs 4. 57 lakh crore ($100.4 billion) will be a challenge in 2010-11. The central bank, however, is confident that the banking sector is ?comfortably resilient? to handle all such stress. It has also accepted that the current volume of FII inflows is in a comfortable range.
RBI?s first-ever Financial Sector Stability report, released on Thursday, says, ?Stress tests for credit and market risk reveal (all) banks? ability to withstand unexpected levels of stress?, including the scenario where even restructured loans also default as NPAs.
The report, conceptualised in the aftermath of the global financial crisis to measure the soundness of Indian banks, however, says some areas of concern will emerge from April. ?The margins of banks may face pressure?, it says, from the mark-to-market impact on their investment portfolio, increased provisioning requirement and the new form of calculating interest on savings bank deposits. All these will add to liabilities of banks.
In the Q3 balance sheets, several banks have reported losses from mark-to-market exposure in their treasury investment portfolio. They are expected to report higher losses in the FY10 results. ?The extent of MTM losses will depend on the duration for which a bank holds the government bonds. If a large proportion of the government portfolio will be held for a short-term duration by way of treasury bills and short term papers, the losses could be low,? said KP Suresh Prabhu, chief bond trader at HDFC Bank.
Releasing the report, Shyamala Gopinath, deputy governor of RBI, said, ?India?s credit quality remains robust but margins of banks may face some pressure. ALM mis-match is not a concern but requires monitoring??.
On the foreign fund inflow it says: ?At the current juncture, there is little evidence that the quantum of inflows has exceeded the absorptive capacity of the economy. While there is a menu of policy options to respond to the challenge, the optimal policy mix will have to be carefully calibrated, taking into account the evolving state of the economy and financial stability considerations??.
The report also says over-reliance on bulk deposits (by some banks) remain at elevated levels, and this could impact the cost and stability of the deposit base. ?With a fast expanding corporate sector and extant exposure norms, the headroom available to banks is constrained and needs to be addressed?. Some of the private sector and foreign banks have raised high-cost bulk deposits as they have limited scope to raise cheap deposits in the absence of a large branch network.?