The global financial system is still far away from a full recovery on account of a slowdown in the US economy, the soft landing in China and the Euro debt crisis. The Indian banking sector has been relatively well shielded by the central bank and has managed to sail through most of the crisis. But, currently in light of slowing domestic GDP growth, persistent inflation, asset quality concerns and elevated interest rates, the investment cycle has been wavering in the country.
The cost of borrowings was higher on account of the various monetary tightening measures undertaken by the central bank. People preferred to park their funds in higher yielding fixed deposits rather than current or savings account (CASA). CASA accretion slowed for most banks which led to a higher cost of funds. The savings bank account rate was deregulated by the RBI, however most banks continue to hold the rate at 4%.
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.
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 and regulatory requirements.
Bargaining power of suppliers
High during periods of tight liquidity. Trade unions in public sector banks can be anti reforms and orchestrate strikes. 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.
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 new banking licenses.
The RBI had to revise its target for credit growth in FY12 a number of times given the external environment. From starting off with a prediction of 19% credit growth in May 2011, the central bank brought this estimate down to 16% in January 2012. Finally non-food credit growth came in at around 17% in FY12 compared to 21.5% in FY11. Against a backdrop of GDP growth deceleration, weak IIP data and persistent inflation banks became more risk averse to lending credit. This deceleration also reflects banks’ risk aversion in face of rising NPAs and increased leverage of corporate balance sheets.
Credit growth decelerated across all bank groups during 2011-12 ranging between 16.3% in the case of public sector banks and 19.7% for private sector banks. The comparable figures for the previous year were 21% and 24.7% respectively.
The RBI’s has not yet rolled back its aggressive interest rate policy and rates continue to be elevated. The repo rate currently stands at 8%, with the reverse repo rate at 7%. While inflation continues to remain high the RBI has refrained from any further hikes in order to address the slowdown in growth. It may ease rates once inflation comes under control.
Growth on the deposit front however remained relatively low coming in at around 13% YoY in FY12; this was as against an RBI target of 17%. Fixed deposits saw good growth, while demand deposits saw a deceleration on lower yields. The outstanding credit-deposit ratio rose from 74.5% FY11 to 76.7% in FY12.
Data source: RBI
In the retail portfolio, while home loans grew by 12% YoY, while vehicle loans grew by 20%. Overall Other personal loans enjoyed a much smaller growth of 8% YoY due to bank’s reluctance towards uncollateralized credit. Credit card outstanding grew by 13% YoY.
Indian banks, however, saw lower levels of money supply, and deposits as a percentage of GDP in FY12 as compared to that in FY11 on account of the uncertain economic environment. However credit as a % of GDP was higher as GDP growth slowed.
Data source: RBI
Most private sector banks had a relatively better outing in FY12. Increased pricing power helped some of these banks sustain their net interest margins. Plus they were also able to sustain their asset quality.
Net non performing assets (NPAs) in the system increased from 0.9% in FY11 to 1.2% in FY12. However for PSU banks this ratio increased from 1% in FY11 to 1.5% in FY12. Increased provisioning affected the profitability of the banks in question.
Basel III is a new challenge that banks in India and overseas will have to surmount. It will be a challenge to deploy the same safely and profitably in the event of persistence of economic slowdown. The government was able to re-capitalize a few PSU banks in FY12, including the much needed infusion for State Bank of India. According to RBI estimates, Indian banks would require additional capital of Rs 5 trillion to meet Basel-III norms by March 31, 2018.
In 2011-12, agriculture loan target was Rs 4.5 trillion, and Rs 4.8 trillion was disbursed. For 2012-13, the target has been set at Rs 5.8 trillion. Financial inclusion initiatives also need to be taken care of as India fares very poorly on this regard as half the population does not have access to banking services.
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. There has so far been no progress on this issue since the RBI issued draft guidelines in August 2011.
However, growth is still a concern for the banking sector in FY12 on account of a sustained slowdown in the economy as well as reduced demand for credit on account of the current high interest rate environment. The central bank expects credit growth to come in at 17%, with deposit growth at 16% for FY13. Asset quality concerns are also an issue especially in the power, textile, and mining space.
In the year 2012-13 so far, there has been a easing of liquidity and monetary conditions. The policy rate was cut by 0.5% in April. In addition there has been liquidity infusions through open market operations export credit refinance. The 1% Statutory Liquidity Ratio (SLR) reduction in August and the further 25 bps cut in the CRR is expected to further ease liquidity and encourage banks to increase loans and advances. The SLR and CRR stand at 23% and 4.25% respectively currently.