Risks to Indian financial system have worsened: Anand Sinha, RBI deputy governor

Mumbai: The risks to the Indian financial system have worsened in the past few months as global instability and rising bad loans begin to weaken banks' financial ratios, a central bank executive said.

"Downside risks to financial stability have worsened due to several global and domestic factors," said Anand Sinha, deputy governor at the Reserve Bank of India. "Our banks are no doubt strong, but there are many challenges and we've to live up to that," he told audience at the annual Ficci-IBA meet.

The stress in the Indian banking system has increased in the past few months as a slowing economy squeezes corporate profitability. Policy inaction at the government level has also resulted in many incomplete project, leading to defaults by corporates. Also, the unsolved European sovereign credit crisis could have a contagion effect if the monetary union breaks up.

"The NPA levels have become higher than what they were a while back," Sinha told reporters later. "So, there is definitely a stress in the system. The amount of restructured assets has gone up. Restructured assets, whether you call it standard or substandard, the fact is even if they are standard, they represent stress in the system." He said the damage could be contained by close monitoring.

In a situation where there's an increasing evidence of deterioration of asset quality at banks, while macroeconomic situation may certainly have an impact, this can still be contained by substantially upgrading the credit management systems so as to be able to contain slippages and improve recovery,'' Sinha said.