RBI asks banks to watch MSME, retail credit; shore up capital buffer

The Reserve Bank of India (RBI) on Thursday asked banks to monitor their exposures to the retail and small businesses, saying both the segments are witnessing high stress.

In its bi-annual financial stability report (FSR), the RBI also asked banks to shore up capital positions while favourable market conditions prevail, improve governance, and remain vigilant in the context of global spillovers.

"The banking sector will be required to specifically guard against adverse selection bias while being alive to the credit demand from productive and viable sectors," the FSR said.

In the most optimistic scenario, the impact of the second COVID wave should be contained within the first quarter of the year, while frictional inflation pressures work their way out over the first half of the year, the report said, asking banks to internalise expectations.

The RBI said consumer credit, which had become a favourite for banks since the reverses on the wholesale side deteriorated after the six-month loan moratorium programme came to an end in September 2020.

Customer risk distribution of the credit-active population underwent a marginal shift towards the high-risk segment in January 2021 relative to January 2020, it said, adding that consumer credit portfolios of non-PSBs (public sector banks) are "seeing incipient signs of stress".

It said the delinquency rates for state-run lenders in consumer credit improved to 1.8 percent in January 2021 from the 2.9 percent in the year-ago period, while the same for private sector banks doubled to 2.4 percent and increased to 6.7 percent from 5.3 percent for non-bank lenders.

In the case of credit to micro, small, and medium enterprises, there was a healthy growth of 9.23 percent shown by private sector banks as against 0.89 percent shown by their state-run rivals, it said, attributing the faster growth to ECLGS (Emergency Credit Line Guarantee Scheme) of the government, under which Rs 2.46 lakh crore was sanctioned as of February 2021.

The FSR reminded that since 2019, weakness in the MSME portfolio of banks and NBFCs has drawn regulatory attention, with the Reserve Bank permitting restructuring of temporarily impaired MSME loans of up to Rs 25 crore under three schemes.

While PSBs have actively resorted to restructuring under all the schemes, participation by private banks was significant only in the COVID-19 restructuring scheme offered in August 2020. "Despite the restructuring, however, the stress in the MSME portfolio of PSBs remains high," the report said.