[sbinews] 2003-04: How the year was for commercial banks (Business Standard)
- From: "Rajendra S. Pai" <rspai9@xxxxxxxxx>
- To: sbinews@xxxxxxxxxxxxx
- Date: Wed, 14 Apr 2004 20:49:11 -0700 (PDT)
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2003-04: How the year was for commercial banks
(Business Standard)
Our Banking Bureau / Mumbai April 12,2004
A year of consolidation
D P Roy
Former chairman,
SBI Capital Markets Ltd
During 2003-04 non-food credit grew over Rs 100,000
crore but there was huge liquidity as deposits marched
on to record a rise of over Rs 200,000 crore.
Profitability has improved, thanks to non-operating
profit on investment sales and government of India
debt buyback programme.
The Reserve Bank of India (RBI) requires the premium
to be utilised for non-performing assets (NPAs)
provisioning, thereby lowering net NPA levels. Food
credit declined by over Rs 13,000 crore, which, apart
from aggravating liquidity, will impact public sector
banks? profitability.
Exposure to commercial papers, equity and debt went
down by Rs 5,000 crore as mutual funds having access
to deposit pool were able to deploy funds through
credit substitutes.
Special monitoring alerts was sounded in the RBI?s
credit policy for 2003-04. The coordination between
RBI, the Securities and Exchange Board of India, the
Insurance Regulatory Development Authority, and the
National Housing Bank has to be proactive; and if
necessary, a body like the Financial Services
Authority of the UK maybe thought of.
Banks showed improved performance in FY 03-04 as
industries like steel and cement had encouraging
turnaround on top of 3 per cent interest rate
reduction.
Despite RBI asking the Indian Banks? Association to
advise banks on benchmarking PLR, the confusion
continues as effective interest rates vary as much as
8 per cent. For top corporates, Mibor is relevant
leading to substantive sub-PLR lending eroding the
very concept of PLR. In this scenario, savings bank
interest rates may be deregulated allowing banks to
innovate and offer savings bank variant products.
Credit growth was largely fuelled by retail portfolio
(mainly housing) which constitutes up to a third of
the loan book in some banks and grew at a scorching
40-50 per cent. Universally, real estate prices are
known to be cyclical and banks need to be cautious as
housing loan maturities extend well beyond commercial
term loans.
And without active term money market instruments such
fixed rate loans are fraught with interest rate risks.
More importantly, the Banking Secrecy Act needs to be
amended so that the credit information bureau is
effective and can avert NPAs particularly in the
retail segment.
As a preventive measure, banks may introduce an
independent external credit review mechanism and in
keeping with best practices RBI may make stiffer
provisioning for impaired assets ab initio.
While launching asset reconstruction companies (ARCs)
is laudable conflict of interest with the banks
selling the asset has to be avoided by keeping
transactions strictly at arms length. Some of the
reduction of NPAs have been effected by transfer to
ARCs but the real success can be judged only when the
asset is disposed of.
The RBI?s recent initiative in regulating unquoted
investments and provisioning for investments including
preference shares/debentures will bring transparency
to banks balance sheets.
Consequently, investments in ARCs and pass through
certificates (if unrated) have to be monitored and
provided for. Given the fierce competition eroding
margins and high cost of technology mergers of banks
is imminent.
It is suggested that supervisory emphasis may shift
from CAMEL to ROCA to make risk management paramount.
It may also be worth revisiting whether the regulator
should be required to review decisions to which he is
a party by board representation.
******************************************************
Customer care to the fore
H N Sinor
Chief Executive,
Indian Banks? Association
Indian banks have done well during 2003-04. According
to the available data, deposits grew by 17.3 per cent
during 2003-04 compared with 16.1 per cent during the
previous year. Investments in approved securities rose
by 24.1 per cent, which was almost the same as in the
preceding year (24.9 per cent).
As for credit offtake, food credit declined following
mainly depletion of stocks due to higher offtake. As
for non-food credit, there was some slackness during
the initial five months, but expanded vigorously
during the subsequent period. Banks had specifically
focused on retail lending and housing. There was also
notable increase in credit to small and medium
enterprises.
Till March 19, 2004, the expansion in non-food credit
aggregated Rs 1,19,684 crore showing an increase of
17.6 per cent. Credit to priority sector registered an
increase of Rs. 33,720 crore (about 16 per cent)
during the first 10 months.
Credit to housing and infrastructure went up by 33 per
cent and 25 per cent, respectively. Retail credit also
had substantially expanded. There was adequate
liquidity in the system due mainly to the continuous
inflow of foreign capital. Consequently, the financial
markets were generally stable and the cost of funds
tended to decline.
The call money rate, for instance, declined from 6.3
per cent by end-March 2003 to 4.3 per cent by
end-March 2004. Yield on the benchmark 10-year
government paper declined by over 120 basis points.
Foreign exchange market was steady, except for the
last week of the year when the rupee gained over 3 per
cent against the US dollar.
Forward premiums on the dollar had significantly
declined indicating, perhaps, the market?s perception
about the likely movement in the exchange rate. Over
the year, the rupee-dollar spot rate gained 5.93 per
cent. The premium on 1-month forward declined by 42.7
per cent but the decline was steep in 6-month forward
(77.5 per cent).
Consequent to these trends, the banking sector would
be posting a healthy growth in profits and
profitability for the year 2003-04 on top of the
extremely good performance during the preceding two
continuous years.
There could be some improvement in the spread due to
the surge in the share of retail loans, on which banks
have the freedom to determine the rate of interest, in
the total credit.
Similarly, the decline in the yield would improve
their treasury income. Banks have used these gains for
the purpose of cleaning up the balance sheet and have
provided adequate coverage for their NPA portfolio. In
fact, most banks have moved to 90 day provisioning
norms.
Customer care has emerged on forefront of every bank?s
agenda and each one is quickly trying to put in place
new products and services. Technology is also getting
the attention that it needs and careful focus is given
on appropriate technology spending. Similarly, risk
management practices are also being strengthened.
There are, however, greater challenges ahead. Banks
have to reckon the fact that treasury gains are not a
sustainable revenue stream. Technology cost and wage
bill are on rise and will continue to have pressure on
operating expenses.
Market risks are for real and banks will have to make
serious efforts to review that investment portfolio to
strike a balance between yield pattern and the risk
profile with specific reference to the duration of the
portfolio. It would be advisable for banks to do a
sensitivity analysis to gauge the resilience in
adverse market conditions.
=====
R.S.Pai, Web Address: http://rspai.tripod.com
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