Banking Sector Analysis Report 

• The global financial system is still far away from a full recovery on account of a slowdown in the US economy as well as the Euro debt crisis. However, the Indian banking sector has been relatively well shielded by the central bank and has managed to sail through most of the crisis with relative ease. But, with the economic buoyancy the world over showing signs of cooling off, the investment cycle has been wavering in the country.
• Public sector banks have been proactive in their restructuring initiatives be it in technology implementation or pruning their loss assets. While the likes of SBI have made already attempts towards consolidation, others are keen to take off in that direction. Incremental provisioning made for asset slippages have safeguarded the banks from witnessing a sudden impact on their bottomlines.
• Retail lending (especially mortgage financing) that formed a significant portion of the portfolio for most banks in the last two years lost some weightage on the banks' portfolios due to their risk weightage. However, on the liabilities side, with better penetration in the semi urban and rural areas, banks garnered a higher proportion of low cost deposits thereby economising on the cost of funds. However, the RBI recently deregulated the savings account deposit rate. However only a few smaller private sector banks have increased their rates while the others have maintained status quo.
• Apart from streamlining their processes through technology initiatives such as ATMs, telephone banking, online banking and web based products, banks also resorted to cross selling of financial products such as credit cards, mutual funds and insurance policies to augment their fee based income. They are also looking at various financial inclusion initiatives in order to spread the use of financial services among India's large unbanked population.

• Supply
• Liquidity is controlled by the Reserve Bank of India (RBI).
• Demand
• India is a growing economy and demand for credit is high though it could be cyclical.
• Barriers to entry
• Licensing requirement, investment in technology and branch network, capital requirements.
• Bargaining power of suppliers
• High during periods of tight liquidity. Trade unions in public sector banks can be anti reforms. Depositors may invest elsewhere if interest rates fall.
• Bargaining power of customers
• For good creditworthy borrowers bargaining power is high due to the availability of large number of banks.
• Competition
• High- There are public sector banks, private sector and foreign banks along with non banking finance companies competing in similar business segments. Plus the RBI is planning to issue a few new banking licenses.

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• Banks managed to better their FY10 performance in FY11, growing above the RBI's 20% estimate for credit growth for the year. Non-food bank credit grew by 20.6% during 2010-11 as compared with 16.8% per cent during 2009-10. Credit growth remained high in the first half of FY11 on account of increased demand from industry and the service sector. Personal loans grew significantly by 17% during 2010-11 as compared with 4.1% during the previous year. Almost all the components except for credit card receivables exhibited high growth.
• Growth slowed down in the beginning of 2011 on account of the RBI's aggressive interest rate policy. In order to fight stubborn inflation, which still remains above comfort levels, the central bank hiked its key policy rates eleven times since March 2010 in an aggressive rollback of its monetary stimuli undertaken earlier. The repo rate currently stands at 8%, with the reverse repo rate at 7%.
• Growth on the deposit front however remained relatively lower coming in at around 17% YoY in FY11. However liquidity remained tight during the year, only seeing some easing towards the end of the year.
  
  Data source: RBI
• In the retail portfolio, while home loans grew by 15% YoY, while vehicle loans grew by 24%. Personal loans enjoyed a much smaller growth of 17% YoY due to bank's reluctance towards uncollateralized credit. Credit card outstanding in fact dropped by 10% YoY.
• Indian banks, however, enjoyed higher levels of money supply, credit and deposits as a percentage of GDP in FY11 as compared to that in FY10 showing improved maturity in the financial sector.
Data source: RBI

• Most private sector banks had a good outing in FY11. Increased pricing power helped Indian banks grow their net interest margins. Most entities chose to reasonably grow their franchise as well as assets substantially during the year on account of increased credit demand and overall buoyancy in the Indian market.
• Migration to the system based recognition non-performing assets (NPAs) caused a sharp uptick in NPAs for PSU banks. Plus, pension and gratuity provisions for their large employee base caused a huge dent in the profits of most PSU banks in the country.

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• With banks having complied with Basel II and having sufficient capital in their books; it will be a challenge to deploy the same safely and profitably in the event of persistence of economic slowdown. While, the government was able to re-capitalize a few PSU banks in FY11, some of them especially SBI still need to shore up their capital base.
• In order to step up agricultural credit the target for bank credit has been increased by Rs 1 trillion to Rs 4.8 trillion for FY12. Banks have been asked to increase focus on credit lending to small and marginal farmers. Plus, under the financial inclusion target, banking facilities will be provided to all 73,000 habitations having a population of over 2,000 during FY12.
• New banking licenses are expected to be issued by the RBI to private sector players. However, these licenses will only be awarded to certain players meeting strict requirements on the capital, exposures, and corporate governance front. Lots of players including NBFCs, industrial houses, microfinance companies etc are all vying for this coveted license.
• However, growth is still a concern for the banking sector in FY12 on account of a slowdown in the economy as well as reduced demand for credit on account of the current high interest rate environment. Asset quality concerns are also an issue especially in the infrastructure, power and real estate space.

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Related Links for Banking Sector
Quarterly Results | Sector Quote | Over The Years