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Put in a subtle way, FY08 was a watershed year for banks that clearly brought out the ones that can resist adversities and take on challenges. Despite the severe liquidity pressure post the repo and CRR (cash reserve ratio) hikes, the money supply remained buoyant during FY08, expanding by 20% YoY, thus outpacing RBI's projections of 17% YoY growth. The growth was mainly driven by a sharp expansion in term deposits and surplus inflow of foreign exchange assets. Bank credit growth that was 24% YoY in FY08, however, far outstripped the incremental growth in money supply leading to inflationary trends. Having said that, the RBI’s reprimanding consistent CRR hikes (from 6.5% to 9.0% until June 2008) and resistance to offer interest on the same took its toll on the sector.
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Growth in mortgage loans (up 14% YoY) along with those to real estate and agriculture sectors nearly halved in FY08. On the other hand, despite the rise in lending rates, the demand for loans from the Industrial sector remained firm. While banks bore the brunt of higher CRR and repo rates on their cost of fund, the NBFC sector enjoyed the absence of the same. What was worrisome although was the doubling of loans via credit cards, which although nominal in size has potential of high delinquency.
The changing dynamics
| (%) |
YoY change at the end of |
| |
May'07 |
May'08 |
| Non food credit |
26.4 |
24.1 |
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|
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| Banks |
|
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| Agriculture |
32.2 |
19.3 |
| Industry |
26.4 |
26.9 |
| Housing |
21.6 |
13.8 |
| Credit card |
45.0 |
87.0 |
| Real estate |
69.7 |
31.9 |
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|
|
| NBFCs |
38.7 |
62.0 |
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A spurt in interest rates over the past year raised concerns over Indian banks' balance sheets in FY08. The PSU banks in particular, took a substantial hit on their investment portfolios on account of the marked-to-market (MTM) provisioning of investments in the available-for-sale (AFS) category. Further these banks had also to provide for the loss of interest on the agri-loans waived by the government.
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Short-term liquidity crunch led to banks scurrying for high cost bulk and term deposits in FY08, even at the cost of narrow margins (NIMs). Thus, while the savings bank interest remained unchanged, the interest rate on deposits of up to one year soared to as high as 9.0% and those for one to two years are fetched upto 10.5% per annum.
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In FY08, as per the RBI mandate, all foreign banks operating in India and Indian banks having operational presence outside India migrated to the Basel II norms with effect from March 31, 2008. All other commercial banks have been encouraged to migrate to these approaches not later than March 31, 2009.
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With most private sector banks and the PSU ones that have complied with Basel II having sufficient capital in their books; it will be a challenge to deploy the same safely and profitably in the event of economic slowdown. Banks are likely to concentrate more on non funded income in this scenario.
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Banks, especially the private sector ones, are likely to face penetration concerns. The lack of credit penetration and the geographic concentration of bank credit is evident from the fact that 5 states having the highest proportion of per capita credit enjoy 55% of the total credit disbursals in the country.
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RBI’s roadmap for the entry of foreign banks and the acquisition of stake by the foreign entities in Indian private banks seems to be a step towards facilitating entry of foreign banks into India. However, the same is set to aggravate the tussle for market share in the already fragmented sector.
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The proposal for Cabinet’s approval to allow PSU banks to bring down the government’s stake in them below the stipulated 51%, which is yet to be tabled, can help the bank raise substantial capital without borrowing at high rates and give the entities an opportunity to enhance their capital adequacy ratios before the Basel II compliances, and compete with their private sector peers.
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