Thursday, August 14, 2008

Banks see rise in bad loans

Inflation has reached at 12%, RBI has increased repo rate and CRR the banks have started getting a feel of bad loans. Even the admissions have begun. Facing the denial for the better part of the current financial year (2008-09), bankers have started admitting rise in bad loans is going to pose a huge challenge in the next few years. Some of the foreign and private banks are already experiencing a rise in delinquencies. Meera Sanyal, country executive, ABN Amro Bank, India, claimed that there is a slight increase in delinquencies for the bank in the credit card and personal loan segments.

Speaking at the sidelines of a banking conference Sanyal said, “But the medium-term outlook remains positive”

Naina Lal Kidwai, country head for HSBC India, also agreed.

Kidwai said, “There could be delinquencies in credit cards, consumer finance and personal loans and maybe mortgages. Retail loan growth could also slow down”.



The cause for increase in the possibility of defaults especially among customers holding credit cards is the rising interest rates.

Banks fearing higher defaults have already stopped or tightened lending norms for consumer finance and auto loans.

Although ICICI Bank, the leader in retail lending in India, is expecting retail lending this year to grow 5-10% after it has seen a frenetic growth in the last couple of years in its retail lending.

Chanda Kochhar, joint managing director and chief financial officer, ICICI Bank, said corporate credit growth will perform better at 16%.

She does not see any impact of higher interest rates on bank’s loan portfolio. “Business growth for the industry may be impacted, but not ICICI’s loan quality,” Kochhar said.

The banks are facing rise in bad loans.

In the same period earlier its net non-performing assets have increased to 1.74% of total assets in the quarter ended June 2008 from 1.33%.

According to analysts bad loans will be a major challenge for domestic banks even though regulators prepare to give relaxation in the restrictions on foreign banks operating in India in 2009.

“We will have to go through some pain because the right processes were not followed earlier and it may impact the industry,” said Ravi Trivedy, executive director, business advisory services, at KPMG, the audit giant and consultant.

He said, “For example, financing for white goods has more or less stopped. Now, if electronic goods are not sold, their makers face losses because they have invested a lot in producing the goods”.

Trivedy added banks can’t avoid the pain. “Reserve Bank of India has no choice but to hike rates if inflation is at 12% and that will be a problem because if people have taken a loan of Rs 50 lakh and paying 7% interest two years ago, now they are paying 14% which means paying double the interest now,” he said.

However Trivedy said the number of defaulters on their home loans in India will be less because, unlike the US, as the home-loans market in India is a “user’s market.”

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