Indian financial system bankable, says RBI panel

The Indian banking system can easily weather a doubling of bad loans or a sudden spike in interest rates that can send bond yields soaring, a stress test of the system by a panel of top RBI and finance ministry officials reveals, highlighting the relative strength of banks in this country amid the turmoil in the global financial sector. The high-level committee on financial sector assessment headed by RBI deputy governor Rakesh Mohan also forecast economic growth of 8% in the medium term, as it concluded that India’s banking sector was an oasis of stability in a global financial sector strewn with effigies of once-mighty international banking names. The panel also suggested that the regulation of housing finance companies be transferred to RBI whose permission should be sought before any change in strategic shareholding. The panel, which explored varying so-called "stress test" scenarios, said most Indian banks had raised enough capital and could easily cope with a steep jump in bad loans. If bad loans rise by 150% — in its worst case scenario — the panel concluded that the overall capital adequacy position of Indian banks falls to 10.6% in September ’08 as against 11% in March ’08. "Even under the worst case scenario, capital remained comfortably above the regulatory minimum," said the panel in its report released on Monday. The other stress test involved an interest-rate shock and the committee noted that an overnight impact of a 244-basis point increase in bond yields resulted in an erosion of 19.5% of a bank's capital and reserves. "The capital-to-risk-weighted assets (CRAR) would reduce from 13% to 10.9% for a 244-basis point shock," it said, adding that only in case of 20 banks, which account for 36% of total assets, would the CRAR slip below the regulatory 9%.