Banks face medium-term risks, says RBI

Credit risks in the near term stem from the robust macroeconomic indicators of the economy, while that for market was on account of developments in the US subprime mortgage market which has led to uncertainty in the financial markets, the Reserve Bank report said.

The corporate sector has had a long stretch of high profitability and it is expected that they would continue to experience high profitability in the near future.

The resultant credit expansion, which is robust, is a concern, and banks could experience high delinquency rate in the near future, the RBI cautioned.

Besides, the current slowdown of credit — as corporates also have the flexibility to raise resources from the international capital market — might lead to a rise in non-performing assets of banks in the coming years.

The last four-year average growth rate averaged 8.6 per cent and the rate is expected to sustain this fiscal year as well.

The first quarter rate during 2007-08 was strong at 9.4 per cent with the industrial sector maintaining its growth momentum despite a slowdown in July and September this year.

The current inflation rate of 3.1 per cent is also likely to come under pressure owing to the rise in global crude oil prices.

On the market risk which banks were likely to face in the near term, the Reserve Bank said disorderly adjustments in the financial markets were likely to have implications for the banking sector by way of liquidity shifts and interest rate changes.