Small companies' defaults to fuel bank NPAs

Source :Indian Express :Tue May 31 2011, 14:52 hrs

Central Bank of India's Chairman and Managing Director S Sridhar today said non performing assets (NPAs) for the industry are likely to increase, as some smaller companies that had borrowed in a low rates regime, find it difficult to service their loans due to hike in rates.

"Some increase in NPAs cannot be ruled out, in my view across the industry," he said, adding that different banks would adopt different strategies to deal with the problem.

The stress will emanate from smaller accounts, which "are not able to bear the increased cost of funding" and are constrained because of a "lower access" to money as compared to the past, he said.

Sridhar pointed out that the stress can be traced back to the years of global slowdown after 2008 September, when the Government announced a stimulus that resulted in high liquidity and low rates.

"Somebody down the chain will have to bear the stress," Sridhar said, adding the stress is "inevitable".

The Reserve Bank had adopted a stance of softening in policy to fuel growth in the slowdown years and then started to tighten it as tackling the growing inflation took precedence.

RBI has raised its key rates a record eight times in the last 12 months in order to tame the inflation number, the last one being a higher-than-expected 50 bps hike on May 3 and also given a guidance of attacking the number even at the cost of a short term blip in growth numbers.

Sridhar said Central Bank of India is installing a software, which will point out stress in assets at an early stage, so that actions of containing it can be taken swiftly.

"The idea is to be proactive than reactive," Sridhar, who retires from the bank today, said.

Central Bank of India today announced a tie-up with brokerage firm Angel Broking, which will announce its account holders to trade in different asset classes like equities, derivatives and F&O, among others.