Weak asset quality and insufficient capital dragged down loan growth, reveals a Fitch Ratings report on the banking sector for FY15.
"It was probably the slowest growth in the decade," Saswata Guha, Director, Fitch Ratings told CNBC-TV18. Stressed assets, capital requirements and weak business model were the main reasons for this subdued growth, he said.
Guha said current capital requirements of Tier 1 public sector banks (PSUs) is 440 basis points lower than private banks.
In PSU banks, Guha said mid-sized banks are worst affected. Big banks like Canara Bank and Bank of India reported huge non-performing loans (NPLs) in the last financial year.
In FY16, marginal growth of nearly 13-15 percent is expected, he said, adding that the recovery will be led by top banks like State Bank of India and Bank of Baroda in the current year.
Below is the transcript of Saswata Guha with Reema Tendulkar and Mangalam Maloo on CNBC-TV18.
Reema: In FY15, we had a seen a marked slowdown in the loan growth. It had fallen from levels of 15 percent in FY14 to sub-10 percent in FY15. How do you visualise FY16? What were the key reasons for the decline in loan growth and will those same reasons result in a weaker loan growth even next year?
A: FY15 was clearly a difficult year not just in terms of loan growth; it was probably the slowest in the decade but also in terms of the asset quality as well as capital. Going forth, from a loan growth perspective, we expect to see some recovery in the current financial year, but we do not think we will see any marked shift from where the numbers are. My sense is that we could potentially look at maybe a range of maybe somewhere between 13-15 percent, the system as a whole.
Clearly, 15 percent would be the outer limit. Reasons are basically two or three essentially. Firstly, it is the much talked about stressed assets. The disproportionate amount of stressed assets that state owned banks hold on the balance sheets and rarely in certain cases is the situation you could argue alarming, particularly in the mid-sized state banks, which have almost nearly a fifth of their loans in stressed assets.
Secondly, it is the capital. We have drawn that comparable between the FY14 and FY15 and found the system average between capitals has widened even further. Today, state owned banks’ average capital, a tier one capitalisation is around 440 basis points short of what private banks have been reporting. This capital will make a difference when it comes to loan growth.
Thirdly, the general business environment, that is where we feel that so far the challenges that the banks have been facing, there is a sort of contradiction with the sort of growth fundamentals that we often get to hear about; 7.8-8 percent sort of a growth we are looking at. Clearly, because of the weak business climate the still high corporate leverage, there is still a fair bit of risk aversion, particularly at state owned banks. Due to these three key reasons, we believe loan growth will continue to remain subdued for FY16.
Mangalam: So, you said that growth for the industry was slightly subdued but across the universe of banks that you did track, could you give us a sense of who the outliers were in terms of which banks did better credit growth and which ones did underperform and do you see them sustaining this run going forward?
A: At least for FY15, if you pan across the various state owned banks, it was the big guys who clearly underperformed. When you see the likes of SBI growing at 7-8 odd percent, and likewise many others including Punjab National Bank (PNB), Canara Bank, and Bank of India (BOI); when almost 50 percent of the system grows at sub double digits, clearly it will have an influence in the system.
SBI, to an extent, and Bank of Baroda are the ones who are potentially better positioned to revive this loan growth in FY16. SBI, from the capital perspective, was already among the large banks; the best capitalised and with talks of another round of capital injection coming in this year. SBI will be best positioned. That does not mean that we will see SBI growing at 20 odd percent. Maybe in low to mid-teens is where we suspect SBI would prefer to grow.
Other than these two, with the rest of the large state banks, they continue to feel the pressure. Bank of India and Canara Bank had actually seen a large surge in their non-performing loans (NPLs) in contrast to some of the other peers. Even PNB, if you look at the large state banks space, account for the largest stock of stressed assets. From our perspective, within the large state banks, it is clearly SBI and Bank of Baroda. I do not expect to see much growth coming from the mid-sized state banks which in our view are the weakest category today.
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