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Influenced by the global financial turmoil and repercussion of the subprime crisis, the global banking sector has been witness to some of the largest and best known names succumb to multi-billion dollar write-offs and face near bankruptcy. However, the Indian banking sector has been well shielded by the central bank and has managed to sail through most of the crisis with relative ease. Further with the economic buoyancy the world over showing signs of cooling off, the investment cycle has also been wavering. Having said that, the latent demand for credit (both from the food and non food segments) and structural reforms have paved the way for a change in the dynamics of the sector itself. Besides gearing up for the compliance with Basel II accord, the sector is also looking forward to consolidation and investments on the FDI front.
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Public sector banks have been very 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.
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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 the banks garnered a higher proportion of low cost deposits thereby economising on the cost of funds.
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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.
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| Supply |
Liquidity is controlled by the Reserve Bank of India (RBI).
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| Demand |
India is a growing economy and demand for credit is high though it could be cyclical.
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| Barriers to entry |
Licensing requirement, investment in technology and branch network.
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| 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.
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| Bargaining power of customers |
For good creditworthy borrowers bargaining power is high due to the availability of large number of banks
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| Competition |
High- There are public sector banks, private sector and foreign banks along with non banking finance companies competing in similar business segments.
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The liquidity crisis that swept the heavyweights of global financial sector off their feet in FY09 did affect the entities in Indian banking sector as well, albeit marginally. Other than the temporary crunch after bankruptcy of Lehman Brothers, the global financial meltdown was weathered by banks in India with relative ease. The monetary stimuli (reduction in repo rate, cash reserve ratio (CRR) and statutory liquidity ratio (SLR)) offered to the banks by the RBI made things easier. Despite the severe liquidity pressure and poor credit appetite at the retail and corporate levels, Indian banks managed to grow their advances and deposits by 24% YoY and 22% YoY respectively in FY09. The growth was mainly driven by a sharp expansion in term deposits and growth in agricultural and large corporate credit. Having said that, higher delinquency levels in retail credit and debt restructuring took its toll on the sector.
Indian Banks : Marginal signs of stress
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FY08 |
FY09 |
Change |
| No. of banks (nos.) |
79 |
78 |
-1.3% |
| Branches (nos.) |
776 |
825 |
6.3% |
| Employees (nos.) |
11,588 |
12,039 |
3.9% |
| Networth (Rs m) |
39,940 |
47,080 |
17.9% |
| Deposits (Rs m) |
420,260 |
519,700 |
23.7% |
| Advances (Rs m) |
313,540 |
383,890 |
22.4% |
| NIM (%) |
4.1 |
4.4 |
7.3% |
| RoA (%) |
1.1 |
1.1 |
0.0% |
| CAR (%) |
13.0 |
14.0 |
7.7% |
| Net NPA / advances (%) |
1.0 |
1.1 |
5.0% |
| Bus. / employee (Rs m) |
63.3 |
75.0 |
18.5% |
| Profit /employee (Rs m) |
0.5 |
0.6 |
20.0% |
Source: Profile of banks FY09
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Indian banks also enjoyed higher levels of money supply, credit and deposits as a percentage of GDP in FY09 as compared to that in FY08 showing improved maturity in the financial sector.
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Despite poor pricing power lower cost of funds helped Indian banks grow their net interest margins in FY09. While few like ICICI Bank chose to reduce their balance sheet size, most entities chose to reasonably grow their franchise as well as assets. Public sector banks outdid their private sector counterparts in terms of growth and franchise expansion in the last fiscal. Improved capital adequacy also helped banks to comfortably comply with Basel II. The higher efficiency levels were the hallmarks of better performance of Indian banks last year.
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Most banks had to restructure some loans in their portfolio during FY09 which deferred their interest income. Further the PSU banks had also to provide for the loss of interest on the agri-loans waived by the government.
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With lesser avenues of credit disbursal, banks had to park most of the liquidity available with them with the RBI. At the end of FY09, banks' investment in SLR securities increased to 28.1% of total deposits from 27.8% in FY08 and higher than the RBI prescribed level of 24%. Feeble credit offtake coupled with the fear of bad loans going up in the scenario of economic slowdown prompted banks to park their surplus funds with the RBI.
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In FY09, 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. All other commercial banks have been encouraged to migrate to these approaches not later than FY10.
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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. 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 has been deferred for the time being. However, the tussle for higher market share in the already fragmented sector is only set to aggravate.
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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 besides competing with their private sector peers.
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