The Hindu Business Line : `Indian banks poised for further growth'

"THE Indian banking sector is possibly the only one in the region that has exhibited clear signs of positive cyclical momentum," according to the latest issue of the journal, the Asian Banker.

With the disbursement of credit by banks adding up to just 5 to 10 per cent of the country's GDP, as against the developed country averages of 70 to 150 per cent, the prospects for the Indian banking industry also remain quite high. "This is compounded by the fact that the population is coming of earning age, with a workforce of 30 crore ensuring that loan demand remains strong," the journal noted.

While acknowledging that retail credit would be engine of growth in future, Mr K.P. Padmakumar, Chairman of Federal Bank warned that most banks were now content with mobilising resources from treasury operations and not sufficient effort and endeavour was being extended to boosting interest income.

The balance sheet of several banks, including public sector banks, reveal that interest income has been dropping sharply. Only credit expansion and surge in volumes will arrest and reverse this trend.

The days of falling interest rate regime are over and the returns from treasury operations are poised to decline. With the increasing purchasing power among its workforce, there was substantial potential for credit expansion, the Asian Banker noted.

The lower interest rate environment has been useful for corporate and debt restructuring. Stimulation of retail lending demand has provided the engine of growth in financial year 2003.

The year has witnessed cumulative retail loan growth rates of about 20 per cent, the journal observed.

In retail financing, the banks have been largely concentrating on mortgages. This was because mortgage lending was less risky, yet involves significantly larger than average loan amounts.

The other facet highlighted in the journal is the government's implementation of a benign interest rate regime in 2002.

As a result, the benchmark 10 year-bond yield declined to 6.2 per cent and further to 5.2 per cent in August 2003. The banks in the country also slashed deposit rates aggressively and trimmed effective lending rates. The average spread has correspondingly widened to the highest levels seen in the decade, the Journal said. It is in this background that the journal has rated Corporation Bank as the second strongest bank in Asia and first among banks in India. HDFC Bank, Jammu and Kashmir Bank and State Bank of Patiala have been rated fifth strongest in Asia and Andhra Bank ninth.

"The Indian banking sector is back on track. The thrust for the future will continue to be in retail banking. The challenge for the banks is to sustain their financial strength, while at the same time improving the quality of their assets," the Asian Banker said.

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