Recently, different banks published their first quarter results for the financial year 2012-13. In a situation when economic growth has fallen from 8.5 per cent in 2010-11 to 6.5 per cent in 2011-12 and the growth prospects for the first quarter not suggestive of a major upturn from the nine-year low of 5.3 per cent recorded in the fourth quarter (Q4) of 2011-12, banks had a difficult time.

The RBI, for a change, had changed its tight money stance in April 2012 when it reduced the repo rate by 50 basis points (bps). Notwithstanding the reduction, interest rates are at elevated levels.

Slowdown effect

Slowing growth coupled with higher interest rates had multiple implications for the operations of the banks.

First, banking business has grown at a much slower pace.

Second, lower business growth restricts the capacity of banks to levy higher interest rates from borrowers. Deposit growth in the system has been lower than credit growth, impairing banks’ ability to lower interest offered to depositors even though the policy rate was lowered. Both these factors affect the net interest income (NII) and net interest margin (NIM) of the banks.

Third, the loan servicing capacities of borrowers comes under pressure, which strains the asset quality of the banking system. When non-performing assets (NPAs) go up, banks are required to make higher provisioning, which ultimately impacts their bottomline.

Fourth, in addition, more cases are referred for restructuring during downturns. Restructuring would require banks to provide for the diminution in the fair value and, hence, affect profits.

A look now on how the prolonged growth weakness has affected banks’ business and financial performance in the first quarter (Q1) of 2012-13.

We consider 37 banks consisting of twenty nationalised banks (NBs), seven new private banks (NPBs), nine old private banks (OPBs) and SBI. These banks account for more than 95 per cent of the business of the banking system.

Before discussing the performance of different bank groups, it would be worth pointing out one caveat. Unlike other banks, Kotak Mahindra Bank reports its NIM on a consolidated basis and not specific to banking operations. As such, Kotak Mahindra Bank has been excluded while computing the NII and NIM for new private banks (NPBs) and the industry.

What follows is an analysis of the performance of different bank groups as well as of all banks on four broad dimensions.

Business Growth

In contrast to the very slow pace of business growth of NBs and OPBs, the growth of NPBs and SBI was robust both sequentially and on a year-on-year (y-o-y) basis. Within PSBs, while SBI had good growth in business at 5.7 per cent, that of NBs was a marginal 0.6 per cent.

While SBI’s business growth was driven by both deposits and advances, for NPBs, credit growth in percentage terms was much higher than deposits on a sequential basis. For NBs, however, the credit growth was negligible and deposits grew by 1 per cent on sequential basis. Deposits growth languished behind credit growth for all banks on a y-o-y basis.

Net interest margin

NII declined for NBs and SBI, leading to a decline in their respective NIMs. Both NPBs and OPBs registered 2.8 per cent growth in NII on a sequential basis, but their NIMs did not witness any improvement.

As such, for all the banks taken together, NIM fell by 10 bps despite a growth in NII by 0.7 per cent. The fall in NIM on a sequential basis could be because of a number of factors.

In an environment of low growth, banks prefer to lend to top-rated clients. Further, given the liquidity shortage in the system, the transmission of the reduction in policy rates was relatively lower for deposits than for advances.

Relatively lower pace of credit growth and increased borrowing requirement of the Government led some banks to invest in government securities (G-Secs) more than the prescribed norms. Yield on G-Secs are relatively lower than on advances. In addition, the increase in loans referred for restructuring must have affected the average yield on advances.


The gross NPAs of all banks increased by 43 per cent on a y-o-y basis, and by 10 per cent on a sequential basis. However, the NPA problem was acute only for SBI and NBs for whom the growth was 56 per cent and 70 per cent, respectively, on a y-o-y basis. Sequentially, the growth in NPAs was also quite high at 19 per cent and 11 per cent, respectively. The gross NPAs of SBI and NBs for the June quarter were reported at 4.9 per cent and 2.7 per cent, respectively. In contrast, the gross NPAs of NPBs and OPBs were 1.9 per cent and 2.1 per cent. Though gross NPA percentages increased sequentially for all the bank groups, the increase was maximum for SBI.

Return on assets

The RoA for all banks taken together has dipped by 2 bps on a sequential basis. While the dip in NIM as well as the increase in NPAs has been common for both NBs and SBI, the RoA for the former has declined and that of the latter has improved. The improvement in RoA for SBI is perhaps a reflection of under-provisioning as reflected in a fall in the provision-coverage ratio for the bank from 68.1 per cent in the March quarter to 64.29 per cent in the June quarter.

For NPBs, RoA has fallen by 10 bps as they have reported higher NPAs on a sequential basis and their NIM has been flat. Though OPBs have also reported flat NIM and an increase in NPAs, the RoA improved by 20 bps in the June quarter on a sequential basis. This has been driven by the sharpest improvement in operating efficiency vis-à-vis other bank groups on a sequential basis.

Banks, in general, face a deterioration in asset quality when growth plummets significantly, as has been the case in India in the past four quarters. However, the degree to which an individual bank will be affected by the NPAs to a great extent will also be contingent upon the composition of its loan portfolio.

NBs have a larger share of big corporate loans and, as such, face the risk of credit concentration. In contrast, NPBs which have a larger share of retail loans, the problem of asset quality is less acute as risk is diversified. In this context, it would serve the NBs to pay heed to the Finance Ministry’s recent directive to reduce the share of bulk loans in their asset portfolio.

(The author is Associate Dean, Xavier Institute of Management, Bhubaneswar. The views are personal.)

(This article was published on August 20, 2012)
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