Indian banks
may have to face a sharp reduction in core profitability this year, as a surging
demand for credit will increase the cost of raising funds, a study conducted by
rating agency Crisil says. It predicts that the net profitability margin (NPM)
of banks may decline by up to 20 basis points to 1.4 per cent in 2007-08. The
core profitability of banks has fluctuated over the years. From 2000-01 to 2004-05,
banks saw an increase in margins, with steady interest spreads, reducing operating
expenses, and stable, though low fee-based income. NPMs
touched a peak of 1.83 per cent in 2004-05. In 2005-06, the trend of improving
profitability margins began to reverse, though it recovered lost ground in 2006-07.
Another decline in profitability appears "highly likely" in 2007-08
the study said. Monetary
measures of the Reserve Bank of India (RBI) over the last few years, including
a 175-basis-point hike in repo rates and an increase of 2 per cent in cash reserve
ratio (CRR) have increased the overall cost of resources for banks. The
cost of deposits has risen by around 60 basis points in 2006-07, and excess statutory
liquidity ratio (SLR) - now at around 3 per cent - is no longer adequate to fund
credit growth. The
SLR norms dictate that banks have to compulsorily park a part of their deposits
in government securities. The minimum level is now at 25 per cent of the net demand
and time liabilities, while the average SLR ratio of the system is around 28 per
cent. The study
recommends that a softer interest rate regime, by the RBI slashing repo rates
or cutting the mandated SLR investments limit, could provide banks with a much-needed
breather, and help improve their core profitability levels. The
study also warns that banks'' asset quality might also be impacted amid strong
credit growth. It said asset quality had improved consistently over the past seven
years, with a steady decline in non-performing assets (NPAs), both in absolute
terms and as a percentage of total advances. Banks have also been diversifying
their advances portfolios in favour of the higher-yielding retail and housing
segments.
also see : General
reports on Banks & Financial Institutions Other
reports on Crisil
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