Indian banks are yet to get rid of financial bruises. In 2012-13, their profitability is likely to â€œdecline sharplyâ€ due to two reasons: stricter regulatory requirements and stress assets, according to a survey done by CII.
Indian banks are yet to get rid of financial bruises. In 2012-13, their profitability is likely to "decline sharply" due to two reasons: stricter regulatory requirements and stress assets, according to a survey done by Confederation of Indian Industries (CII) taking feedback from 15 lenders including five state-owned, three private sector and seven foreign entities.
"From an average growth of 23 per cent witnessed during the last year (FY 2011-12), the surveyed banks have projected an increase of 14 per cent in profit after tax (PAT) for FY 2012-13. However, it is interesting to note that this has been forecasted to rise to 21 per cent in FY 2013-14, reflecting increased optimism of banks for a change in scenario positively," the survey report said.
However, the CII survey did not specify the names of those surveyed banks. The CII survey christened as "Health of Indian Banking sector in current regulatory environment" assessed the prevailing market conditions vis-à-vis asset quality, capitalisation of banks and growth estimate of the banking sector while focusing upon the current regulatory environment and its impact on bank business and profitability.
Key Performance Indicators
Growth in Net Interest Income
Growth in Profit After Tax (PAT)
Return on Equity
So, what are the regulatory challenges?
The Basel III– an international standard for banks' capital requirement is likely to have the highest impact on profitability of the Indian banking sector. Public sector banks, according to the RBI estimate, will require Rs 5 lakh crore capital to meet Basel III norms. Among the other key regulatory requirements, the revised guidelines on priority sector lending and higher provisioning norms for restructured assets would also impact on bank's profit after tax, the respondent banks said in the survey.
In October, 2012; the Reserve Bank of India had expanded the reach of priority sector lending by incorporating some new clauses. Those included loans upto Rs 2 crore to companies doing business in farming and allied activities and credit to housing finance companies for loans up to Rs 10 lakh disbursed for the poor.
In February, 2013; RBI also proposed to increase the provisions against restructured loans from 2.75% to 5% in a staggered manner till March, 2015.
"Since the global financial crisis the regulatory environment for the banking sector has changed significantly globally. Even as growth, inclusion and stability have been the key focus areas in the Indian context, the current regulatory and policy environment is critical to ensure that banks remain financially sound and profitable", said Chandrajit Banerjee, Director General, CII.
Changes in key policy rate & CRR
According to the survey, 64 per cent of the respondent banks are expecting 25 basis points cut in repo or the policy rate at which banks borrow money from the central bank. The rest does not see any change. This means, RBI is likely to cut repo by another 25bps to 7.50% on March 19. So far in FY13, RBI has reduced policy rate by 75 bps in two tranches (50bps in April, 2012 and 25 in Jan, 2013).
At the same time, a majority of surveyed bankers (82%) see 25 bps cut in cash reserve ratio or the portion of deposits banks keep with RBI to 3.75%. The liquidity situation remains tight on account of advance tax payment. Banks are currently borrowing more than Rs 1 lakh crore every day through the RBI borrowing window called LAF.
Indian banks are yet to get rid of financial bruises. In 2012-13, their profitability is likely to "decline sharply" due to two reasons: stricter regulatory requirements and stress assets, according to a survey done by Confederation of Indian Industries.
Loan growth & asset quality
On the back of economic downturn the non-food credit growth will be weaker than the previous years. On an average, banks expect the pace of growth at 17% in line with the central bank's projection. However, it would expand at 18 per cent in FY2013-14. Agriculture loan is going to be key driver of industry credit growth and is likely to grow at 23 per cent this year buoyed by near normal monsoon.
However, the delay in repayments continues to haunt banks. Most of the surveyed banks have recorded a sharp deterioration in asset quality in the current year, as reported by an increase in their non-performing and restructured loan accounts. As per the survey findings, 88 per cent of the respondent banks anticipate a rise in their restructured loans.
"The credit downgrade of big Indian banks is seen as a warning signal of stress on asset quality facing the Indian banking sector. According to the Reserve Bank of India (RBI), the gross NPAs of the Indian banking system (as a percentage of gross advances) at 3.1 per cent during FY12 (end March 2012) were the highest in the last six years, rising from 2.5 per cent in FY07," the survey pointed out.
In between April and September 2012-13, the corporate debt restructuring (CDR), a platform to draw scheme of restructuring between lenders and borrowers, recorded a nearly 50 per cent rise in proposals received for restructuring aggregate debt, from Rs 1.64 lakh crore to Rs 2.46 lakh crore on a year-on-year basis.
Deposits would rather grew at a slower pace at just 14% as against the projected 16% by RBI. The deregulation of savings rate coupled with higher rate of deposits offered by banks would fail to garner public deposits, cheap source of funds for lenders.