Development banks capable of handling shocks: FinanStability Report
Unlike commercial banks, national-level development banks are better equipped to cushion impact of real estate market shock as they are less exposed to the sector, and also have comfortable liquidity situation, according to a report.
"The stress test of 18 – out of the 20 national-level development banks – that hold deposits of over Rs 2 billion, revealed that capital adequacy ratio (CAR) of only three banks would fall below 10 per cent, if 15 per cent of the credit turned bad or is not paid for three to six months, according to the Financial Stability Report published by the central bank.
Likewise, capital adequacy ratio of only two development banks would drop below 10 per cent level, if 25 per cent of the loan extended to real estate and housing sectors turned bad, according to mid-January report. "Capital adequacy ratio of five development banks would fall below 10 per cent, if five per cent of the total credit turned into bad debt," it reported, adding that in general, development banks remain less vulnerable to credit and liquidity shocks compared to commercial banks.
The less susceptibility of national level development banks to various shocks is contributed to low exposure to real estate sector.
The data also revealed that development banks had extended Rs 12.69 billion loan as of mid-January to real estate – some 8.7 per cent of credit portfolio – and down from 9.7 per cent in mid-July 2013.
Likewise, the report also stated that all development banks were in a comfortable position in terms of liquidity in mid-January, as ratio of net liquid asset to total deposits stood at 32.1 per cent. "The comfortable liquidity position has helped national level development, as capital adequacy ratio of only one national-level development bank is expected to fall below 10 per cent, if 10 per cent of the deposit is withdrawn," it reported, adding that capital adequacy ratio of five development banks would drop below 10 per cent, if 15 per cent of the deposit is withdrawn. "But national-level development banks could be in trouble, if 20 per cent of their deposit is withdrawn as the stress test revealed that 12 institutions, or 67 per cent of banks surveyed, would see their capital adequacy ratio fall below 10 per cent, if 20 per cent of their deposit is withdrawn."
The central bank has made it mandatory for development banks also to conduct stress test from January. They have to submit results to the central bank on quarterly basis like the commercial banks.