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Banks lose out to cheaper fund sources
Jul 22, 2015

The banking industry has been highly impacted by the slowdown in the economy. On one hand, the sluggish credit offtake has reduced its interest income. At the same time increased loan defaults by the troubled infrastructure sector have led to increased provisioning and reduced earnings for banks. Also piling up of bad debts has constrained the capital strength particularly of public sector banks. But economic recession may not be the sole reason for the subdued financials of banks in FY15. An interesting study has pointed out that banks may have also battled competition from non-banking sources during the year.

As per a study, banks saw their share in incremental fund flows in the economy erode from 65% in FY14 to 45% in FY15. And the gap has been filled in by non-banking fund sources such as corporate debt and equity financing. According to the study, the net portfolio inflows in to corporate debt stood at $17 bn in FY15 as compared to net portfolio outflows of $4 bn in FY14. On the other hand, equity financing from foreign direct investment (FDI) and primary market issues increased from $34 bn in FY14 to $46 bn in FY15. The falling corporate bond spreads in turn fuelled the rally in equity markets translating into cheaper capital for companies. Thus higher inflows of foreign funds provided companies with low cost alternatives to bank credit in FY15.

Data Source: Financial Express, RBI & Edelweiss Securities

This Chart Of The Day was published in The 5 Minute WrapUp - Turnaround story vs. Boring business: Which is better?

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