Banks' margins may slip, focus on i-banking by 2020

Indian banks' outstanding mortgages are expected to cross 40 trillion rupees by 2020 but margins will see downward pressure making fee income more important for profitability, according to a banking report released at an industry event on Tuesday.

Margins are likely to slip as wholesale debt markets deepen and corporate customers access the wholesale markets directly, according to the report released by the Federation of Indian Chambers of Commerce and Industry, Boston Consulting Group and Indian Banks' Association.

State-run banks see a higher likelihood of their margins being squeezed as compared to private sector or foreign banks, it said, adding net interest margins (NIM) of public sector banks have consistently declined, reflecting a "pessimistic view on future margins adopted by the public sector."

NIMs have grown from a little less than 2.5% to about 3% for private sector banks, but public sector banks have seen margins dropping from about 3.2% to under 2.5%, it showed.

However, "as yields in large corporate banking fall with further deepening of wholesale debt markets, the banking industry in India will find cost-effective ways to serve the small and medium enterprises customers where yields are quite high."

Infrastructure is likely to occupy a larger share of balance sheets with banks estimated to have accumulated infrastructure assets worth 20-25 trillion rupees on their books by 2020. This would touch 12-15 percent of total advances, the report said.

"The real challenge for banks would be to develop skills to undertake the risks of long gestation infrastructure projects and manage concentration risk in infrastructure."

According to the report, India's investment banking will be amongst the fastest growing segments in the banking industry rising from 4 percent to 7 percent of the entire corporate banking revenue pool.

Larger corporate customers are expected to demand higher support for international expansion and mergers and acquisitions over the next decade.

Besides, with wholesale debt markets deepening, larger corporate would avail of advisory and capital markets services from banks, ensuring a "shift in revenue pool from traditional corporate banking to investment banking and advisory," it added.