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Banks prefer interest risk to credit risk: RBI
New Delhi, Mar 21: High fiscal deficit is pushing banks to `limit` long-term industrial financing and instead prefer housing finance, according to RBI.
New Delhi, Mar 21: High fiscal deficit is pushing banks to "limit" long-term industrial financing and instead prefer housing finance, according to RBI.
In its latest bulletin, RBI also said banks preferred to take more interest rate risks rather than credit risks, thereby leading to restricted fund flow to industries. "Banks seem to prefer interest rate risk to credit risk, and as long as the fiscal deficit is high, this option will always be available to them," RBI Deputy Governor Rakesh Mohan was quoted as saying. He also said the banks' interest rate risk preference was due to their assets, which were largely long-term government papers, in tradeable form.
Highlighting that the housing finance was emerging as a competitor (because of Securitisation and high recovery) for project finance, he said the ability of banks for long-term industrial financing was limited and therefore asked India Inc to tap the markets.
In its latest bulletin, RBI also said banks preferred to take more interest rate risks rather than credit risks, thereby leading to restricted fund flow to industries. "Banks seem to prefer interest rate risk to credit risk, and as long as the fiscal deficit is high, this option will always be available to them," RBI Deputy Governor Rakesh Mohan was quoted as saying. He also said the banks' interest rate risk preference was due to their assets, which were largely long-term government papers, in tradeable form.
Highlighting that the housing finance was emerging as a competitor (because of Securitisation and high recovery) for project finance, he said the ability of banks for long-term industrial financing was limited and therefore asked India Inc to tap the markets.
"Given the maturity profile of their assets and liabilities and the existing fiscal deficit, banks' ability to lend in the medium and long term seems to be limited," Mohan said, adding the maturity structure of liabilities of banks was essentially short-term in nature, making banks keep the maturity of their loans short.
In terms of the broad framework of industrial financing, he said, "It clear that there is sufficient room for a greater role for market financing." However, Mohan cautioned it did not mean that the Indian economy was ready for a shift to market-based system of finance.
Bureau Report