The Reserve Bank of India must monitor foreign exchange exposures and debt levels of Indian companies and reduce the exposure limits of banks to corporate groups, a report from the International Monetary Fund recommended.
“Group concentrations have reached troubling levels at some banks,” the report said. Prudential norms allow bank exposure to a single corporate group to go up to 55% of the bank’s capital, the report said. Indian banks’ asset quality has deteriorated over the last two years and bad loans have increased as mid-sized companies and even some large companies found it difficult to service their debt levels amid a slowdown in the economic growth.
Large loan accounts of Kingfisher Airlines and Deccan Chronicle have been labeled bad by banks and several other big companies have asked for restructuring of their loans. The IMF released its update on Indian financial system on Wednesday in which the fund said the country’s financial system is still vulnerable.
“Despite recent successes, India’s financial sector still confronts longstanding impediments to its ability to support growth as well as new challenges to stability,” the IMF report said.
The report also said the mandatory holdings of government securities for banks must be reduced gradually.
RBI requires banks to invest at least 23% of their deposits in government bonds under statutory liquidity ratio norm. Currently, the level of SLR holdings of the banking system is around 30%.
The IMF report said captive holdings in the government securities along with large share of the state holdings in banks raises risk of capital misallocation and build-up of fiscal contingent liabilities.
Public sector banks account for nearly 70% of banking sector’s assets and liabilities. Further, the report said developing the capital markets for infrastructure financing would relieve the banks and thus reduce the asset-liability mismatch for them.