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Tightening the screws - Views on News from Equitymaster
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  • Feb 12, 1999

    Tightening the screws

    Notes on 'The Trend and Progress of Banking in India 1998-99' published by the Reserve Bank of India

    The verdict is out. The foreign banks have regained the top slot and are once again the most profitable banks in India (on the basis of Return on Assets in FY99). The private sector banks come in second and then the public sector banks. On the whole, the scheduled commercial banks (SCBs) turned in a sub par performance, with return on assets declining mainly due to a decline in the net interest income (as % of total assets) and an increase in the intermediation cost (as % of total assets).

    Return on Assets

    In short, financial year 1999 (FY99) was not a rewarding year for the banking sector. The banks continued to face a slowdown in economic activity that resulted in lower credit offtake. What made the situation worse was the volatility in interest and exchange rates that resulted from the spread of the Southeast Asian crisis.

    Both the private sector banks and the foreign banks recorded a steady decline in the RoA between FY97 and FY99. Public sector banks, however, bucked the trend to post a rise in the RoA during FY98. This can be explained by the sharp fall in intermediation costs (as % of total assets) of the public sector banks.

    Intermediation cost (as a % of total assets)

    Net interest income
    Net Interest Income (NII), expressed as a % of total assets, for the SCBs registered a steady decline from 3.22% in FY97 to 2.78% in FY99. The decline in the lending rates and lower credit offtake due to sluggish economic conditions took their toll on the banking sector.

    Net Interest Income (as a % of total assets)

    The public sector banks came out much better than its competitors in registering a decline of only 35 basis points in NII (expressed as % to the total assets) as compared to 66 basis points for the foreign banks and 83 basis points for the private sector banks. The advantage for the public sector banks stems from the large pool of low cost savings deposit at their disposal that enables them to keep the overall cost of funds under check.

    Provisions and contingencies
    The data pertaining to provisions and contingencies by the SCBs brings to light a few interesting points. There has been a steady decline in provisions and contingencies (as % of total assets) for the SCBs from 1.15% in FY97 to 0.98% in FY99. This is despite serious concerns being voiced over the high level of non-performing assets that were not provided for especially by the public sector banks.

    Provisions and Contingencies (as a % of total assets)

    The provisions and contingencies by the public sector banks declined significantly in FY98, and this could be one prime reason for the sharp jump in their profitability (RoA) in that year. The public sector banks have, however, registered an increase in provisions for FY99. The private and foreign sector banks posted a decline in provisions and contingencies in FY99. Foreign banks continue to make provisions for a larger chunk of their assets. This could be attributed to greater risk taking and more stringent accounting norms.

    The Indian banking sector has turned out, at best, a mixed performance for FY99. Even though from the consumer point of view, there has been a tremendous improvement in services, facilities and products of the banking sector, lots more needs to be done to increase the competitiveness vis--vis the international banks. Then there is a question of the financial health of the Indian banks. With the Reserve Bank of India constantly tightening the screws on the banks, it is likely that the fundamental changes will continue to occur thus benefiting the entire economy. What remains to be seen is whether the domestically owned banks will continue to remain competitive once capital account convertibility in introduced in the economy.



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