Sensitive sectors will struggle if rates rise, say bankers

Bad loans could pile up faster in rate-sensitive loan categories such as home, automobile and real estate if interest rates keep rising, bankers said on Tuesday, referring to the central bank's steep 50 basis-point hike in the rate at which it lends to (and borrows from) banks.

Speaking to reporters after the announcement of the First Quarter Review of Monetary Policy by the Reserve Bank of India, Mr Pratip Chaudhuri, Chairman, State Bank of India, said accumulation in non-performing assets would accelerate in those sectors where interest rates comprise a significant part of total cost.

Mr M.D. Mallya, Chairman and Managing Director, Bank of Baroda, said, the rate hikes posed challenges to some infrastructure segments such as power. “Unless certain reforms are worked out, it could be a big challenge. Having said that, in certain interest sensitive segments, normally pressure will come with a lag, and therefore, going forward it can increase the pressure on asset quality,” he said.

Companies that are highly leveraged or (loans to) small and medium enterprises where margins are typically lower could face problems with regard to non-performing assets, said Mr M.V. Nair, CMD, Union Bank of India.

According to Mr Aditya Puri, Managing Director, HDFC Bank, while bad assets would increase, the banking industry will not face any systemic problem.

Mr Chaudhuri said bankers had taken up with the RBI the issue of revising the definition of identification and classification of non- performing assets.

In the meeting, banks also sought changes in the classification of an account into standard or sub-standard. Bankers want it to be based on the security and cash flow generation, rather than the current practice of linking it to the date when a project starts commercial production, he said.

Currently, many projects are classified as standard or sub-standard based on whether the commercial production date has been achieved or not.

Only infrastructure projects are given a concession with regard to the production date. Even other sectors face constraints such as delays in commencement of production, and banks would like this to be extended to other projects as well, he said.