Recent developments in the US subprime mortgage market coupled with robust domestic economic growth have exposed Indian banks to medium-term risks, the Reserve Bank of India (RBI) said in its annual Report on Trend & Progress of Banking released on Tuesday.
RBI has identified two major sources of risks faced by banks: a benign credit risk and market risk. Credit risks in the near term stem from the economy?s robust macroeconomic indicators, while the market risk was on account of developments in the US subprime mortgage market that has led to uncertainty in financial markets, the RBI report said.
The corporate sector has had a long stretch of high profitability and it is expected that they would continue to experience high profitability in the near future. The resultant credit expansion, which is robust, is a concern and banks could experience a high delinquency rate in the near future, RBI cautioned.
Besides the current slowdown in credit, the fact that corporates also have the flexibility to raise resources from the international capital market might lead to a rise in banks? non-performing assets in coming years.
The growth rate of the past four years, which averaged 8.6%, is expected to be sustained this fiscal year, too. The Q1 rate in 2007-08 was strong at 9.4%, with the industrial sector maintaining its growth momentum despite a slowdown in July and September this year. The current inflation rate of 3.1% is also likely to come under pressure owing to the rise in global crude oil prices, the report added.
On the market risk banks were likely to face in the near term, RBI said disorderly adjustments in the financial markets were likely to have implications for the banking sector by way of liquidity shifts and interest rate changes.