Higher provisioning to affect banks profitability: CRISIL
CRISIL Research has come out with its report on "Monetary Policy Review October 2012". The research forecasts net interest margins of the banking system to decline by 10-15 bps in 2012-13 as sluggish credit offtake will limit the pricing power of banks.
October 30, 2012 / 19:15 IST
CRISIL Research has come out with its report on "Monetary Policy Review October 2012". The research forecasts net interest margins of the banking system to decline by 10-15 bps in 2012-13 as sluggish credit offtake will limit the pricing power of banks.
RBI hints at rate cut in early 2013The Reserve Bank of India (RBI), in its monetary policy review on October 30th, reduced the cash reserve ratio (CRR) by 25 basis points (bps) to 4.25% while keeping the repo rate unchanged at 8%. Despite revising its 2012-13 gross domestic product (GDP) growth forecast sharply downwards to 5.8% from 6.5% projected in July 2012, the central bank refrained from reducing the repo rate. This is because upside risks to inflation remain due to high rural wage growth, inadequate supply response in food articles and temporary pressures from administered fuel price revisions. Persistently high non-food manufacturing (core) inflation, largely on account of cost-push pressures from rupee depreciation, was cited as a major concern. Despite a 50 bps reduction in the repo rate in April, 150 bps cut in CRR since January, a 100 bps cut in the statutory liquidity ratio in August and infusion of Rs 1.7 trillion through open market operations, the reduction in average base rates - minimum lending rate charged by banks - has been limited due to high inflationary expectations and increased default risk. After holding the repo rate at 8% since April, RBI has hinted that a rate cut could happen in early 2013.Asymmetric monetary policy transmissionMonetary policy transmission has been weak since the RBI front loaded a 50 bps policy cut in April 2012 to bolster growth. From April-September 2012, the base rates across 10 large Indian banks have fallen by only half of this or 25 bps.In contrast, from July 2010 to March 2012, the increase in the maximum and minimum base rates was commensurate with the 275 bps increase in the repo rate over the same period.Rising corporate risk and high inflation limit policy transmissionThe downward rigidity in lending rates reflects: (i) higher default risk as corporate profitability is being impacted by slowing GDP growth, and (ii) bid by banks to maintain the real rates of return in the light of high inflation. Persistently high inflation at over 7.5% for the last 2 quarters provides limited space for reduction in deposit rates, thereby keeping the cost of funds high for banks despite a 50 bps repo rate cut in April 2012.Higher provisioning on restructured advances to affect profitabilityThe RBI, citing tightening liquidity, decided to support growth with a 25 bps cut in the CRR. The reduction would result in non-income generating funds worth Rs 175 billion flowing into the banking system, thereby lowering the overall cost of funds for banks. This is likely to translate into lower lending rates on select portfolios, especially in the retail segment, and further push credit ahead of seasonal demand pick-up in the second half of the year.CRISIL Research forecasts net interest margins of the banking system to decline by 10-15 bps in 2012-13 as sluggish credit offtake will limit the pricing power of banks.The increase in provisioning on restructured advances to 2.75% from 2.0% will pull down the net profits of banks by about Rs 20 billion. A majority of the increased provisioning would be required by public sector banks.Disclaimer: CRISIL Limited has taken due care and caution in preparing this Report. Information has been obtained by CRISIL from sources, which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. CRISIL Limited has no financial liability whatsoever to the subscribers / users / transmitters / distributors of this Report. The Centre for Economic Research, CRISIL (CCER) operates independently of and does not have access to information obtained by CRISIL's Ratings Division, which may in its regular operations obtain information of a confidential nature that is not available to C-CER. No part of this Report may be published / reproduced in any form without CRISIL's prior written approval.The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.To read the full report click on the attachment 
Read More
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
