The impact of the economic slowdown continued to be felt by India Inc in 2009, and the banking industry was no exception. But the performance of Indian banks was better than their global counterparts.
For the fiscal ended March 2009, banking behemoth State Bank of India posted a net profit of Rs 9,121 crores, up 35.5% as compared with Rs 6,729 crore in the previous fiscal. Other Indian banks also continued to be profitable in a scenario where global giants like Deutsche Bank and Royal Bank of Scotland posted huge losses.
“This was because local banks had stable net interest margins, they did not have to provide very high credit costs due to restructuring norms of the Reserve Bank of India. The robust treasury incomes also helped,” said Chintan Doshi, associate director (financial institutions) at Fitch Ratings.
Treasury income was boosted by a dip in the bond yield, which fell as the Reserve Bank of India resorted to a series of rate cuts in the first half of 2009 to infuse liquidity into the system.
The reverse repo and repo rates were at 5% and 6.5% on January 1, 2009 and the two key rates were slashed by 100 basis points each later in the same month. The rates were slashed again in March by 50 basis points each and then in April by 25 basis points each. The reverse repo and repo rates are currently at 3.25% and 4.75%, respectively.
However, even though banks were registering profits, their credit growth was slowing down, which affected the asset quality.
For the current financial year (April 2009 till now), banks have had to lower their credit growth targets and they saw a rise in non-performing assets (NPAs).
“The asset quality for banks has significantly deteriorated in 2009, as can be seen from the addition of NPAs as a percentage of Gross NPAs. This ratio has surged to 76%, even as the recovery of NPAs has declined,” said Yashika Singh, head of economic analysis at Dun & Bradstreet.
The banking industry expects the trend of rising NPAs to continue for at least two more quarters. “Asset quality of banks would remain under pressure in 2010 and, consequently, bank’s profitability measured in terms of return on assets could decrease,” said Doshi.
There are also talks of withdrawal of the stimulus packages, which could make matters worse for banks. “Withdrawal of the stimulus package in full or part could adversely impact credit uptake. As on January 29, 2010, bank credit growth stood at 14.83%, suggesting that the banking industry is likely to miss the RBI’s 16% loan growth forecast for FY10,” said Singh.
The easy liquidity that was flowing in the economy in 2009 may get squeezed further this year. This is because the rising inflation is becoming a cause of concern. To curb inflation, the Reserve Bank of India has already hiked the cash reserve ration by 75 basis points to 5.75% in the monetary policy review last month. A further hike may also be in the offing. “A hike of 25 basis points each in repo and reverse repo may be done some time in March-April,” said Singh.
As a result 2010 may turn out to be a year of challenges. “Inflationary pressures, the RBI’s policy stance and the ability of banks to manage loan-portfolio quality will determine the sector’s prospects,” said Saugata Bhattacharya, senior vice-president at Axis Bank.
Banks are optimistic that growth will also return. “The growth will be led by corporates and it will be followed by retail,” said P Sitaram, chief financial officer at IDBI Bank.
RBI has recently proposed a move to replace the benchmark prime lending rate with base rate from April 1 and this may result in more flow of funds to meet the requirements of the retail segment and small corporates.
“The other challenges are financial inclusion, better leveraging of technology, expansion of alternate delivery channels and accelerated credit delivery, more particularly to infrastructure, agriculture and small and medium enterprises,” said M D Mallya, CMD, Bank of Baroda.
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