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RBI's new norms may affect banks' balance sheet

Published on Mon, Nov 17, 2008 at 12:19 | Source : CNBC-TV18

Updated at Tue, Nov 18, 2008 at 09:03

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The Reserve Bank of India's (RBI) new set of norms aims at reducing risk weights and standard asset provisioning guidelines that are needed for different sectors.

Will this be a conclusive solution to the problem at hand?

Latha Venkatesh, Banking Editor, CNBC-TV18 said:

These steps were taking to allow more money into real estate companies or any of the specific sectors. The whole Idea of provisioning and higher risk weights was because a whole lot of money two years ago was going into some specific sectors like personal loans, real estate loans, housing loans, resulting in an overheating of certain sectors. The RBI like any prudential central bank normally cautions banks by saying too much is going there and it might create an asset bubble and advises them to set aside a little more provisioning.

Now that there is no overheating in those sectors, those penal provisioning has been removed but it doesn't mean it is inviting people to go and lend in this sector. The slew of bankers I spoke to merely said they were not looking at cutting rates, they said they would cut rates when the cost of funds became cheaper. Most of them haven't really dropped their deposit rates, those that announced, have announced it prospectively from December 1. They will wait and watch and as an when the cost of money goes down that is when deposit rates will come down and only then will one see a meaning full fall in lending rates.

Banks would be selective as to whom they would offer lower rates and how they will offer them. They will focus on their NPA's and not lend aggressively to any sector which is well known and widely known to be vulnerable.

So one must not assume that there is going to be a rush of money to real estate because of these steps. The cautionary penal step of higher provisioning has been removed and that doesn't mean that banks have been exhorted to go and will lend to them.

Here is a transcript of Sunita Nagpal's comments on CNBC-TV18. Also watch the accompanying video.

Lower standard asset provisioning prospectively encourages higher risk lending. The RBI has announced a reduction in commercial real estate risk weight from 150% risk to 100% risk. This raises Tier-I ratio of banks by 10-40bps. Although, these measures give headroom for loan growth, they reduce the balance sheet comfort. It increases the risks of defaults and puts pressure on banks.

Some foreign brokerages had put sell on private banks due to expected compression in margins. However, the cost of funds still continue to be high and the risks of non-performing loan (NPL) is rising as well.

BNP Paribas has cut its target prices for banks due to expected multiple contraction and increase in risk premiums, although upgrade earnings will factor in the impact of policy rate cuts. The bank will cut its target price to Rs 620 from Rs 950 for ICICI Bank, Rs 90 from Rs 120 for IDFC and Rs 2250 from Rs 2650 for HDFC.