Indian banking industry bore the brunt of persistent inflation in FY13

The Indian banking industry has witnessed a period of steady growth during the last decade, with banks along with their customers embracing robust systems and processes. The industry has recorded a consistent rise in the number of reporting offices in last few years. With Reserve Bank of India stressing the policy of financial inclusion, there has been a renewed emphasis on rural expansion. However, a large part of Indian village population still remains without banks. It will require further expansion from Indian banks to raise the penetration levels of banking services in the country, especially in rural areas, home to more than 65% of Indian population.

Following rapid growth experienced in the past few years, the Indian banking industry experienced a slowdown in FY13. Persistent high inflation forced the RBI to maintain the benchmark interest rate at high levels. This slowed down the credit off take in the country, which led to an industrial slowdown. Except agricultural loans and personal loans, all other sectors recorded subdued loan growth. High inflation also eroded domestic savings, resulting in a lower deposit growth. However, higher interest rates and volatile market conditions attracted more depositors towards the high yielding and risk free term deposits of scheduled commercial banks. The prevailing adverse economic conditions deteriorated the asset quality of the commercial banks, particularly the public sector banks. High interest rates during the period led to a sharp increase in non-performing assets in public sector banks, bringing their profitability under pressure. The government of India has embarked upon a need-based recapitalization of public sector banks so that they can comply with Basel III norms. The norms will be fully phased in by March 31, 2018.

In a recent development, the Reserve Bank of India finalized the guidelines on licensing of new banks in the private sector. It also invited applications for licenses from eligible promoters with a cut-off date of July 1, 2013. Hence, the long term outlook for Indian banking sector is stable because of a large unbanked population, rising per capita income and a growing middle class. Emergence of new players and technology upgrades will further add to the growth of this sector.

Key Findings

• As of March 31, 2012, the      total assets of scheduled commercial banks of India were around INR 83tn      (USD 1.5tn). In the 2007-12, the total assets of the scheduled commercial      banks grew at a CAGR of 19.1%.
• In January 2013, the      Reserve bank of India cut the CRR (cash reserve ratio) by 25 basis points      to 4% to infuse an amount equivalent to INR 180bn in the banking system.      Since January 2012, the CRR has effectively been cut by 2% points which      has infused a liquidity equivalent to INR 1,325 bn into the banking      system. RBI used it as an alternate route to revive growth in 2012.
• In December 2012, the      total loans and advances of the banking system grew by 17.6% y/y.      Investment grew by 14.4% while balances with banks and money at call or      short notice grew by 1.7%. Balances with RBI registered a steep decline of      15.2% as a result of reduction in CRR rate.
• Total      deposits of scheduled commercial banks grew by 11% y/y at the end of      December 2012. This was much below its long term growth trend of 19%. High      inflation caused an erosion in the domestic savings of people, resulting      in subdued growth in deposits.

Chart: Inflation during calendar year 2012-India (in %)

Source: RBI

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Indian Banking Industry banking on new hopes after testing times

India’s GDP grew by 6.1% in the third quarter of fiscal year 2012, recording its worst performance in last 3 years. This slowdown in growth was primarily a result of high inflation, high interest rates and policy paralysis. Indian banking industry also suffered some setbacks during the course of the year because of the prevailing unfavorable environment. Number of reporting offices of commercial banks crossed the 90,000 mark and was recorded at 91,558 by the end of September 2011. Population served per office also declined to 13,100 during the same period. The asset size of scheduled commercial banks was estimated at INR 71.8 trillion by March 2011.

The country suffered from high inflation throughout the year with inflation rate (CPI) hovering around 9%. In order to curb the inflation, Reserve bank of India increased the benchmark repo rate seven times during the year with an effective increase of 225 basis points. The persistent high interest rate slowed down the credit demand and deteriorated the asset quality of the banks, especially in the public sector. The ratio of non-performing assets has gone up to 2.9% by the end of year, sharply rising from 2.3% in the previous year.

Reserve Bank of India issued draft guidelines for the implementation of Basel III framework across the Indian banking industry beginning from January 2013. Some of the banks will have to generate extra capital to meet the stipulated requirements. Government has earmarked INR 158.9 billion in the union budget to recapitalize the public sector banks.

Gross bank credit only grew by 15.8% YoY compared with 27.3% in the previous year. This was mainly due to slow growth in non-food credit. Personal loans were less affected and registered a 12.8% YoY growth driven primarily by high growth in consumer durable, vehicle, and educational loans. Priority sector witnessed a credit growth of 5% as the banks became more risk averse with micro-credit registering a decline of 27.2% YoY. Meanwhile, deposits grew by 16.7% driven mainly by 19.4% increase in time deposits while demand deposits shrunk by 1.1% in comparison with previous year.

State bank of India registered an annual net profit growth of 15.4% but there was a steep rise in its gross NPA ratio which rose to an alarming 4.2% in the third quarter of fiscal year. Punjab National Bank also had a 20% increase in its gross NPA ratio by the end of December 2011. HDFC was the best performer in terms of net interest margin, which was stable around the 4% mark. It also registered a 31.4% YoY growth in the net profit. ICICI bank registered a net profit growth of 20.3% but recorded a low net interest margin of 2.7% in third quarter. More than 47% of the deposits of HDFC bank and SBI came from current and savings account as on December 31, 2011.

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