Fitch Ratings today says that the credit profile of
the Indian banking sector has improved during the last
two to three years, helped by investment in risk management
systems and a benign credit cycle.
rating agency also noted that the financials of Indian
banks strengthened even as the Reserve Bank of India gradually
tightened the prudential norms. However, Fitch noted that
despite recent progress on disclosures by Indian banks,
a lot more still remains to be done in this regard.
a report titled Indian Banks: Prudential Regulations,
Fitch observes that notable changes include increased
general provisions on certain retail loan categories,
increased risk weight on real estate exposures, permitting
banks to issue hybrid capital and shifting to a 90-day
norm from 180-day for recognition of non-performing loans.
rapid loan growth as well as the proposed capital charge
for operational risk under Basel II and tightening risk
weights on various loan categories has increased the banks'
need for capital. With the government's holdings in many
public sector banks close to the statutory minimum of
51 per cent, the RBI has allowed banks to issue perpetual
debt instruments for inclusion in Tier 1 capital and Upper
Tier 2 subordinated debt instruments.
II capital norms will be applicable from FY07 (though
the RBI has stated that it is possible that the March
2007 implementation date may be stretched slightly given
the state of preparedness of various banks). Banks are
required to adopt the "standardised approach"
for credit risk and the "basic indicator approach"
for operational risk. The final guidelines on the new
capital adequacy framework under Basel II have yet to
recognition of NPLs is based on the objective norm of
90-days overdue, RBI has encouraged banks to build additional
provisions based on consistently applied accounting policies.
The rapid growth in the relatively new retail loan business
had raised concerns on whether the credit risk is being
appropriately priced by banks, particularly since part
of the portfolio is unseasoned.
recent (FY05 onwards) changes introduced by the RBI, including
increased general provisions on standard assets (to 0.4
per cent, up from 0.25 per cent) and higher general provisions
(1 per cent) on personal loans, capital market and commercial
real estate exposures as well as residential lending above
INR2 million, has addressed this issue. Fitch believes
that this would help banks better prepare for any downturn
in the credit cycle, especially given increased risk weights
on personal and credit cards loans (all 125 per cent)
and commercial real estate exposures (150 per cent), as
well as higher risk weight for residential mortgage loans
(75 per cent) as compared to the Basel II requirement
of 35 per cent.
guidelines for an asset liability management framework
proposing a migration to duration gap analysis from the
existing method of gap analysis are still pending. Also
awaited are revised guidelines on investment classification
and valuation. As per the proposed guidelines, unrealised
gains / losses on the "available for sale portfolio"
is to be carried forward in the balance sheet instead
of crediting (or debiting) the income statement, thereby
reducing volatility of reported profits in a changing
interest rate scenario.
provision of unrealised gains will not be eligible as
an item of capital funds; however, accumulated unrealised
losses will be deducted from Tier 1 capital. The new guidelines
also propose to tighten norms for classification of investments
in the "held to maturity" category.
Fitch notes that disclosures by Indian banks have improved
during the last three years, the agency says a great deal
more still needs to be done. Specifically, disclosures
concerning loss on reconstructed assets, modified duration
of the investment portfolio, sensitivity of various advances
and investments to changes in interest rate, breakup of
outstanding provisions and credit exposure to the various
sectors would be useful.
report also provides an update on the regulatory framework
for capital adequacy, income recognition, provisioning
norms for NPLs, exposure norms, and investment classification
and valuation norms. The report will be available shortly
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