The Hindu Business Line : Banks’ profit, assets quality may decline in 2007-08: Study

Mumbai, Sept. 9 Banks will continue to have a higher credit growth but there will be a decline in their core profits and assets quality in the current fiscal.

This is among the key observations of a study conducted by Crisil on the banking industry for the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Indian Banks’ Association.

According to the study, the banks’ core profitability levels may decline by 20 basis points to 1.4 per cent in 2007-08 from 1.6 per cent last year. This is mainly because the 175 basis points hike in repo rates by the Reserve Bank of India, in the last couple of years, and a hike in the Cash Reserve Ratio by 2 per cent have increased the overall cost of resources for banks.

The cost of deposits increased sharply by around 60 basis points in 2006-07. Further, excess SLR, now at around 3 per cent, is no longer sufficient to fund credit growth. Given this situation, the banks’ scramble to mobilise deposits to fund the high level of credit growth is bound to put further pressure on the cost of resources, the study said.

The study feels that though the inherent asset quality of the banking system has significantly improved, strong credit growth may bring its own risks, which could impact asset quality.

Further, considering the increasing competition in the retail asset segment and banks’ quest for higher yields in the retail loan segment, the gross NPA and weak assets of the banking system will increase marginally, says the study.

Banks’ credit growth is expected to remain high at around 25 per cent this fiscal. The proportion of bulk deposits will continue to grow, but at a slower pace, and banks would gradually shift their focus towards retail term deposits.

Current and Savings Account (CASA) levels are likely to reduce marginally over the medium to long term, as depositors would opt for higher-yielding investments.

The study also says that after implementation of the Basel II norms, the overall capital adequacy ratio could improve, by around 50 bps, on account of reduction of risk-weighted assets in the corporate loan book. On the retail housing front, the capital adequacy of the entire industry could be impacted, because of aggressive underwriting standards during the recent mortgage boom. As the Basel II norms prescribe 75 per cent risk weight instead of the current 100 per cent, on assets that are classified as regulatory retail, this will lead to capital savings in priority sector advances, the study said.

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