Companies have raised foreign currency convertible bonds or FCCBs in pre-financial crisis years carrying zero or low coupons. The RBI said that these bonds would need to be replaced with more expensive domestic borrowing. The Reserve Bank of India has warned banks on the deteriorating asset quality and has called it the most significant risk. The central bank released the latest Financial Stability Report on Thursday. The central bank has also put a red flag on the rising speculative activity in the stock market and risks posed by the falling rupee on refinancing of corporate loans. RBI highlighted that the incremental credit to power and telecom sectors was higher than the aggregate credit growth and advised banks to carefully monitor asset quality. “Restructured assets in power, telecom at 8.5 per cent of total restructured assets as of June 2011,” RBI said in the report. This was 5 per cent at the end as of March 2011. Such accounts as a share of aggregate banking sector non performing assets rose to one per cent from 0,4 per cent during the same period. Bank shares have underperformed the rest of the market over the past six months as many analysts have raised the issue of rising level of non-performing loans. The BSE Bankex fell 21 per cent while the BSE Sensex has shed 10 per cent in value. On financial markets, RBI has raised a red flag on the surge in speculative trading. It has observed that the there is a surge in the derivative trading and it is not accompanied by an increase in the turnover in the cash market. This means the market is witnessing a higher speculative activity than before. The ratio of cash trading volume to the derivative market trading volume fell to 0.1 from 0.4 at the beginning of 2011. The central bank has also noted that intermediaries are playing in the derivative market on their propreitary or own accounts. The overall participation of the retail investor has declined and the evolving structure needs to be watched. The share of proprietary trading in derivatives segment has gone up considerably to 48 per cent in 2010-11 from 35 per cent in 2008-09 whereas the share of non-institutional clients or retail client has declined to 42 per cent from 59 per cent during the same period. RBI has also highlighted external factors of concern. The rupee depreciation has led to a significant refinancing challenges. Companies have raised foreign currency convertible bonds or FCCBs in pre-financial crisis years carrying zero or low coupons. The RBI said that these bonds would need to be replaced with more expensive domestic borrowing. RBI has permitted the buyback of FCCBs at a discount, extended the window for such buyback and allowed firms to refinance from overseas borrowers under the automatic route. “Proposals for restructuring of FCCBs not involving change in conversion price are being considered under the approval route depending on the merits of the proposal,” the report said. Between 2005 and 2010, Indian companies issued FCCBs of US$23bn of which US$7.8bn (at redemption value) worth of FCCBs mature in 2012. “With stock prices depressed, a large majority of the issues would need to be redeemed, and refinanced by domestic ‘expensive’ debt in most cases, creating refinancing risk as well as impacting profitability,” said IIFL, a Mumbai-based securities firm in a note last month.
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