Business Daily from THE HINDU group of publications
Friday, May 25, 2007
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Business Daily from THE HINDU group of publications Friday, May 25, 2007 ePaper |
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Public Sector Banks Money & Banking - Outlook PSBs' portfolio revamp likely to hit asset yields C. Shivkumar
Wrong turn Bid to increase credit flows to farm, industry Retail advances key to sustaining high yields Non-food credit down since beginning of year
Bangalore May 24 The Finance Ministry-inspired portfolio rebalancing of public sector banks (PSBs) is likely to adversely impact the average yield on assets. Banking sources said that this was likely to begin reflecting in the first quarter of the current fiscal itself. The Ministry and the Reserve Bank of India mandated portfolio rebalancing of the PSBs, in an apparent bid to increase credit flows to farm and industrial sectors and contain portfolio risks. However, bankers said that while credit flows to both these sectors have increased, the average yield on assets has come under pressure. The average yield on assets is currently about 9.2 per cent. This is a weighted yield of investments, cash balances and advances. This figure is likely to drop below nine per cent during the current quarter, they added. According to the bankers, retail advances are a major factor behind sustaining high asset yields. Retail lending, including personal and automobile loans, was done at internal rates of return of over 12 per cent by the PSBs. In some cases, it was as high as 13 per cent. Retail portfolios comprise 27-30 per cent of banks' advances portfolio. However, bankers said that with portfolio rebalancing mandate now in full swing, PSBs are being pushed to "cut and run." This is despite the fact that such assets had helped banks generate high profits during the last four years. As a result of portfolio rebalancing, non-food credit has actually dropped Rs 37,000 crore since the beginning of this year. A shift from retail credit is taking place in urban and rural sectors despite the fact that low-ticket loans pose low lending risks. In fact, the retail lending portfolios risk weightage was 50-75 per cent under the new capital standards of the Bank for International Settlements, reflecting the low risk. Bankers said that asset yields were also under pressure of increased delinquency on real estate advances. This was despite the fact that most PSBs have taken the soft option of enhancing the period rather than increasing the equated monthly instalment. Despite this, delinquencies are now about 3.5 per cent of the real estate loan advances. Besides, what is also beginning to worry bankers is the rising cost of working funds. The weighted average cost of working funds for public sector banks has risen to 5.5 per cent from 4.75 per cent last year. This was on account of increased deposit rates, as PSBs compete with National Small Savings schemes and postal deposit schemes to offer rates above 8.5 per cent for time deposits. The banking sources said that combined effect would translate into contraction in the net interest margins (NIM), which is the difference between interest earned and interest expenditure.
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