The Hindu Business Line : Year of strong growth for banking sector

Unabated demand in credit resulting in strong business growth along with wider options for raising funds have seen banking industry perform well in 2006. Hardening interest rates may have made the credit dearer, but this did not stop banks from expanding their balance sheets. Loan books of banks have grown by about 31 per cent, while riskier asset classes (such as retail, real estate and SMEs) have clocked a higher growth of about 45 per cent on an average.

Fee-based focus

It was a year that saw the banking regulator come hard on several operational and policy-related issues. Higher provisioning, greater risk-weights, hike in CRR, waiver of interest on banks' cash balances with the RBI, tighter norms on capital market exposure have reduced their operational flexibility to some extent. However, their focus on non-fund based activities has worked to their advantage, helping them boost their profitability.

Upward revision in lending rates following hike in key rates by the RBI has translated into higher lending rates for banks. Yields on advances, on an average, moved up by about 10-15 basis points to nine per cent in 2006.

Scramble for funds

There has been some pressure, however, on the funding side. While advances grew by over 30 per cent, deposits during the first nine months lagged behind, clocking a growth of about 20 per cent. Scramble for funds among banks impacted their funding costs, pushing up short-term deposit rates to over eight per cent.

Banks that resorted to bulk deposits such as Syndicate Bank and Corporation Bank were hit harder. Banks that focussed on a more controlled credit growth such as Andhra Bank and Punjab National Bank, fared better in improving their net interest margins compared to their peers.

The rally in the bond market during the second half of the calendar year helped some banks in booking profits on their investment portfolios. Banks such as Canara Bank, Union Bank of India and Indian Overseas Bank reported lower provisioning for the September quarter.

Consolidation wave

Another key trend that was observed during the year was the increasing role of old private sector banks in the consolidation wave. That the shareholders of United Western Bank got compensated at a premium price by the acquirer (IDBI) is in itself a marked deviation from earlier instances of amalgamation among banks.

Centurion Bank of Punjab's takeover of Lord Krishna Bank, Ganesh Bank of Kurundwad's merger with Federal Bank and ICICI Bank's takeover of Sangli Bank - all of which have pointed to the significance of valuations attached to the assets of old private banks in the consolidation exercise. Their well-established branch network and strong customer relationships have placed a premium on their valuations.

Strategic alliances

Strategic alliance among banks was another highlight of the year. Three mid-sized public sector banks - Indian Bank, Corporation Bank and Oriental Bank of Commerce - struck an alliance to leverage their balance sheet strength and share benefits of economies of scale, thereby, endorsing the fact that size does matter. This may well be a precursor to consolidation, as banks would be required to augment their capital base and attain scale as they prepare for transition to Basel II.

Relaxation of the RBI's norms on capital-raising options by banks has also benefited them immensely. Total mobilisation of funds from domestic market up to November was close to Rs 41,000 crore while about Rs 10,000 crore was raised from overseas markets through bond issuances.