Stressed-out banks

The financial performance in the first quarter, of the few top public sector banks give room for concern. At least three top banks have seen their profits dip by around 25 to 30 per cent in the first quarter when compared to the previous year. A closer look at their results would also show that this is the outcome of a fall in the ‘net interest margin' (the difference between the average income earned on a rupee of loans and of deposits) for banks have been under pressure. Barring one or two exceptions, for most banks, NIMs have been falling and, in a few cases, quite steeply.

What is clear is that while interest rates have been on the upswing generally over the past year, pricing power is still not decisively in the hands of banks, thanks to competition. Banks have been forced to hike their deposit rates also in a bid to keep their customers from going elsewhere. And for the same reason, they have had to delay their lending rate hikes. That explains why NIMs have dropped. Despite the compression, however, for most banks, NIMs are still in the region of 2.7 per cent even now. Last year, the RBI Governor had asked banks to learn to live with a lesser NIM and offer better returns to depositors and more competitive rates for borrowers. That's perhaps happening now with some delay. It must be said here that Indian banks enjoy higher margins than those in other emerging markets, and can improve their efficiency without denting their profitability. A rise in the gross value of non-performing assets of many banks is the other area of concern. For some, if not all, they have grown by as much as 35 per cent over the past one year. Of course, in terms of causes, there are the usual suspects — the small and medium enterprises (SME) sector as well as agricultural defaults. But the restructuring of loans in the infrastructure sector is a pointer to the potential for further trouble in the days to come.

The markets expect at least one more hike before the end of this year. What this will do to borrowers who are already under stress can well be imagined. Banks have already seen some extra slippage in their non- performing assets after they migrated to system-based recognition of NPAs. As the process gets underway at various banks this year, there could be a little more deterioration. It's time for them to bring management focus to this problem and concentrate on recovery and upgradation/restructuring of viable accounts. The next quarter is likely to be a difficult one given the signs of an economic slowdown.

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