Money & Banking

Current meltdown severe than sub-prime crisis

T.S. Krishnamurthy | Updated on March 12, 2018 Published on October 02, 2012


A study of the movement of share prices of some of the leading banks between a year-ago period and now makes for interesting reading. Except a few new-generation private sector banks, all other banks have witnessed a steep fall in their share prices. This fall is reflective of the deteriorating financial health of and the maladies affecting banks, especially Public Sector Banks. Let us analyse some of the trials and tribulations faced by banks resulting in the lacklustre show in the stock market.

The first and foremost factor affecting banks is the unbridled growth in Non-performing assets (NPAs) which in turn is the reason for the many ills affecting the industry. Added to the already burgeoning NPAs, many restructured accounts are getting ripe for becoming NPAs.

The Indian banking industry cannot be immune to the overall meltdown of global economy. While banks came out with only minor bruises during the sub-prime crisis in US during 2008, the current global crisis has affected them in more ways than one. Exports have shown a decline due to the adverse economic conditions in US as well as European countries. The domestic market has also slumped due to spiralling inflation and the consequent increase in the prices of essential commodities. As the Finance Minister has pointed out, the middle class is postponing purchase of consumer durables resulting in lower production and sales, leading to defaults in payment of dues to banks.

Industrial production is at its lowest ebb and there is a dearth of viable projects for financing by banks.

All banks are facing constraints in the field of resources mobilisation. Normally, pubic deposits should be the main source for credit growth. With the cost of living shooting up due to an increasing food and non-food inflation, savings of the middle class has come down. Even those who can save are tending towards non-financial assets such as gold and real estate expecting high returns while the inflation-adjusted return from bank deposits is near negative. Credit growth is currently due to the injection of liquidity by RBI through its varied operations based on which no enduring commitment can be made.

Paradoxically, while the scope for lending to large industries has become limited due to sluggish industrial growth, the credit-deposit ratio of the banks has risen to an all time high level of above 75 per cent.

How can this happen?

This is partly due to the slowdown in deposit mobilisation and partly due to Target-Oriented lending to sectors such as agriculture, small businesses, and small and medium scale industries.

This is true especially of PSBs. With cultivable acreage in the country shrinking continuously, it is a moot point how banks can go on increasing farm credit to the extent mandated by RBI and the Government. A short-cut found by banks is to go for agricultural gold loans which are almost entirely used for consumption purposes.

Hit by inflation, rising interest rates and shrinkage in production due to power cuts and other infrastructural shortcomings, borrowers in the MSME sector are unable to service the loans, resulting in NPA accretions.

While on the subject of credit growth, we have to have a look at the concentration risk faced by banks. A study by Credit Suisse reveals that banks’ exposure is concentrated on a select group of 10 corporate houses competing in the same sectors such as steel, power, roadways and other infrastructure products. The study says that more than 20 per cent of the incremental loans in the last financial year were to the 10 groups. Loans to these groups amount to 13 per cent of the entire bank loans and 98 per cent of the net worth of the banking system. The Net Interest Margin (NIM) of banks is shrinking. The major affecting factor is the alarming rise in NPAs. Besides, being unable to book income on these accounts, banks also have to reverse the income already booked but not collected. Another factor is the increasing cost of deposit mobilisation. In spite of the fairly high interest rates paid by banks, retail depositors are shying away for reasons cited above. Banks have to mobilise high-cost bulk deposits, which constitute almost 40 per cent of the deposit portfolio of some banks.

Another reason is that when there is a hike in interest rates, banks are often unable to pass on the increase proportionately to blue-chip companies with high bargaining power.

Non-interest income which is a major source of profitability for the banks has also taken a hit. Till recently, income on remittances such as demand drafts, telegraphic transfers, etc was a major source of non-interest income. With the introduction of core banking and online remittance facilities such as RTGS and NEFT with little or no charges, instruments such as demand drafts are all but extinct. With exports shrinking and importers playing cautiously due to the depreciating rupee, income from LCs and bank guarantees is also showing a declining trend. Banks are increasingly turning to cross-selling to boost their non interest income.

Cross selling is basically selling of non-banking products to customers to boost non-interest income. This entails selling of insurance products and units of mutual funds of their own subsidiaries or even other establishments. While at the corporate level, top executives are pushing the ground level staff hard to increase cross-selling, branch managers are not so keen to push this forward. The reasons are lack of expertise in marketing these products and a conflict of interest. Branches are afraid of a flight of their own deposits to these products resulting in non-achievement of their deposit targets.

(The author is a retired DGM of SBM and SBT)

Published on October 02, 2012

A letter from the Editor


Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!

Sincerely,

Support Quality Journalism
null
This article is closed for comments.
Please Email the Editor
You have read 1 out of 3 free articles for this week. For full access, please subscribe and get unlimited access to all sections.