Banking: Any positive signals? - Views on News from Equitymaster

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Banking: Any positive signals?

Oct 8, 2001

The non-food credit of banks finally showed some sign of improvements for the September month. The rise of Rs 35 bn YoY was the largest increase during the current fiscal year, indicating some positive signs in the industrial growth rates. However, year to date (April to September 21), the incremental credit has risen by just Rs 97 bn compared with Rs 251 bn increase during the corresponding period of previous year. The total credit has also witnessed a YoY fall of 29% to Rs 619 bn.

Meanwhile, the aggregate deposits of banks increased by 21% to Rs 759 bn year to date. This is despite softer interest rates. Uncertain environment has contributed to this rise. As a result of sluggish growth in credit to industrial sectors and less investment opportunities in equity market, banks are flooded with excess funds, which are invested in debt markets.

Since the beginning of the current fiscal till September 21, 01, investments of banks surged by 85% to Rs 816 bn. This is much higher than the figure of total bank credit (Rs 619 bn). Banks are increasingly shifting their focus to investment income with buoyancy in the debt markets. Favourable interest rate scenario is likely to keep gilt prices firm. This would result in appreciation in the banks investment portfolio and a consequent rise in investment income.

Banks in general are expected to report dismal topline growth in the September quarter due to lack of credit demand. However, an extraordinary rise in investment income is expected to compensate for a decline in core interest income. Operating margins could however remain firm on the back of cost cutting exercise by most public sector banks (PSBs).

Also, a satisfactory growth in other income is expected to maintain the bottomline of banking companies. Both public and private banks are now concentrating on income from non-fund based banking activities such as fees and commission, forex and money-market trading income. Other income of the private banking sector jumped by 117% in the June quarter YoY and the PSBs reported a 25% rise in other income. This pushed the earnings growth of the entire banking sector by 27% in the June quarter.

If the economic environment improves in the second half of the current fiscal (led by lower interest rates), banks could tap the investment opportunities in the industrial sector. However, they are wary of lending to long-term projects, as the risk of assets becoming non-performing is high. This means that there would be more supply of funds for working capital loans and in a competitive scenario it would pressurize interest spread of banks.

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