New Delhi: A report by the Reserve Bank of India (RBI) trends and progress of banking in India during 2006-07, has raised concerns about impact of adjustments in global financial markets on the interest rates in India and resulting increase in defaults. According to RBI, any unexpected change in world financial markets may result in a sharp increase in interest rates. This could have its effect on the default rates, which could also drastically increase and thus affect the profitability of banks in India.
The report mentioned that, the US sub-prime mortgage crisis has caused increased volatility and uncertainty in the markets. This has exposed the banks to some degree of risk. Though the global financial imbalances have eased, they can still influence the interest rates and liquidity.
The credit growth in India during the past three years have been exceptional and if the interest rate increase, the banks could witness a higher default rate. Such trends are clearly visible during past few months when the rise in interest rates caused panic and forced the borrowers to flee the market. RBI said," The slowdown in credit during 2007-08 could also result in banks reporting higher NPA ratios. Owing to rapid credit expansion of the last few years, it is possible that banks experience high delinquency rate in the near future. This, combined with the slowdown of credit, might lead to rise in the NPA ratios of banks in the coming years. However, such rise is not expected to be significant and, on the whole, credit risk environment would continue to be benign. The impact of a fall in equity market would not be serious for banks as they have only modest direct and indirect exposure to the equity market."