Insurers, MFs run risk of contagion from banks: RBI

Insurance companies and mutual funds run the risk of contagion from the banking sector, cautioned the Reserve Bank of India.

Random failure of a bank which has large borrowings from insurance companies and mutual funds may have significant implications for the entire financial system, said the RBI’s Financial Stability Report.

Banks increased reliance on borrowed funds, especially short-term funds, due to disproportionate slowdown in deposit growth (at less than 14 per cent as at March-end 2012) vis-à-vis credit growth (16.3 per cent). This could translate into rollover and liquidity risks for banks.

Gold loan cos

Another example of interconnectedness cited by the RBI is between gold loan companies (non-banking finance companies) and banks.

The high dependence of gold loan companies on the banking system for funds could pose risks to the latter, in case the business model of these companies falters.

The exponential growth in the balance-sheets of the NBFCs, which are lending against gold, in recent years coupled with the rapid rise in gold prices along with expansion in the number of their branches is a cause of concern.

The Challenges

Going into 2012-13, the operating conditions for the Indian banks are expected to remain challenging given the weakening global economic outlook, adverse domestic macroeconomic conditions and policy uncertainties.

Banks in India are likely to be affected due to de-leveraging in advanced countries, though the direct impact is expected to be limited.

The RBI said concerns on loan quality persist as the growth of non-performing loans (up by 43.9 per cent as at March-end 2012) accelerated and continued to outpace growth. The increase in NPLs in FY12 was largely from priority sector, retail and real estate sectors.

Going forward, power and airlines sectors are likely to continue to face funding constraints and could also be affected by prevalent policy uncertainties. These could pose challenges to the banks’ loan quality.

Risks to stability

The combined effect of the dismal global macroeconomic situation and the muted domestic economic performance has caused marginal increase in the risks to the stability of the financial system.

The threats to stability are posed by the global sovereign debt problem and risk aversion, domestic fiscal position, widening current account deficit and structural aspects of food inflation.

The RBI said the downside risks to growth may persist given the headwinds from the global economy and moderation in private and government consumption and investment demand.

The persistence of overall inflation in the face of significant growth slowdown points to serious supply bottlenecks and sticky inflation expectations.

kram@thehindu.co.in