The BSE’s banking index is down
12% year to date, underperforming the Sensex, which rose 6.8% during the same
period. This shows the stock market is not confident about the banking
industry.
What’s more, the outlook going forward too is negative, according to Moody’s, a global credit rating agency.
Here are reasons why our banks are troubled:
What’s more, the outlook going forward too is negative, according to Moody’s, a global credit rating agency.
Here are reasons why our banks are troubled:
• Weak economic conditions:
Banks work within the framework of the economy. They are not buffered from weak economic conditions. India’s economy is growing at sub-5% levels, down from its peak economic growth of 9%. It is expected to grow at 5-5.5% levels in the current fiscal. It has also been battling with persistent high inflation and exchange rate volatility.
This has forced the RBI to keep key benchmark lending rates high. This not only impacts demand for loans, but also increases cost of operations for banks. Profitability of banks, thus, falls.
• Bad asset
quality:
As the economy slows, companies find it difficult to repay loans. If companies default in interest payment or repayment of their loans, these are classified as non-performing assets or bad loans. Asset quality of banks has been deteriorating since the past few years.
Bad loans as a percentage of total loans rose to 3.3% in FY13 from 2.4% in FY11, according to the Moody’s report. When calculated as a percentage of total shareholder equity and loan loss reserves, the amount of bad loans rose to 26.9% in 2012-13 from 20.6% two years ago.
This is likely to continue as corporates continue to see slow revenue growth. The infrastructure sector is the most affected. But the problem is spread across sectors. The ratio of net debt to equity has risen to 257% in FY013 from 193% in FY11, Moody’s reported.
• Decline in profitability:
Banks borrow money from depositors and lend money at a higher interest rate. The difference between the interest rates on deposits and loans is the key source of income for banks. This is called the net interest income (NII).
For 40 banks, NII rose by 13% in the July-September quarter of the current fiscal from the previous year, according to a report in the Mint newspaper. However, the net profit of the banks fell nearly 25% over the same period, the report added. This is because banks have to set aside a portion of their profits to take care of bad loans. This is called provisioning which jumped 63% for the 40 banks.
Also, in a weak economic climate, banks also have limited capacity to raise interest rates to make up for the losses. This puts further pressure on profitability.n a terse response, K C Chakrabarty, deputy governor, Reserve Bank of India, said recently that he was worried about the future of Indian banks when asked about banks of the future.
Banks are essential to the growth of an economy. India’s banks have been under stress for a while now.
The BSE’s banking index is down 12% year to date, underperforming the Sensex, which rose 6.8% during the same period. This shows the stock market is not confident about the banking industry.
What’s more, the outlook going forward too is negative, according to Moody’s, a global credit rating agency.
Here are reasons why our banks are troubled:
• Weak economic conditions:
Banks work within the framework of the economy. They are not buffered from weak economic conditions. India’s economy is growing at sub-5% levels, down from its peak economic growth of 9%. It is expected to grow at 5-5.5% levels in the current fiscal. It has also been battling with persistent high inflation and exchange rate volatility.
This has forced the RBI to keep key benchmark lending rates high. This not only impacts demand for loans, but also increases cost of operations for banks. Profitability of banks, thus, falls.
As the economy slows, companies find it difficult to repay loans. If companies default in interest payment or repayment of their loans, these are classified as non-performing assets or bad loans. Asset quality of banks has been deteriorating since the past few years.
Bad loans as a percentage of total loans rose to 3.3% in FY13 from 2.4% in FY11, according to the Moody’s report. When calculated as a percentage of total shareholder equity and loan loss reserves, the amount of bad loans rose to 26.9% in 2012-13 from 20.6% two years ago.
This is likely to continue as corporates continue to see slow revenue growth. The infrastructure sector is the most affected. But the problem is spread across sectors. The ratio of net debt to equity has risen to 257% in FY013 from 193% in FY11, Moody’s reported.
• Decline in profitability:
Banks borrow money from depositors and lend money at a higher interest rate. The difference between the interest rates on deposits and loans is the key source of income for banks. This is called the net interest income (NII).
For 40 banks, NII rose by 13% in the July-September quarter of the current fiscal from the previous year, according to a report in the Mint newspaper. However, the net profit of the banks fell nearly 25% over the same period, the report added. This is because banks have to set aside a portion of their profits to take care of bad loans. This is called provisioning which jumped 63% for the 40 banks.
Also, in a weak economic climate, banks also have limited capacity to raise interest rates to make up for the losses. This puts further pressure on profitability.n a terse response, K C Chakrabarty, deputy governor, Reserve Bank of India, said recently that he was worried about the future of Indian banks when asked about banks of the future.
Banks are essential to the growth of an economy. India’s banks have been under stress for a while now.
The BSE’s banking index is down 12% year to date, underperforming the Sensex, which rose 6.8% during the same period. This shows the stock market is not confident about the banking industry.
What’s more, the outlook going forward too is negative, according to Moody’s, a global credit rating agency.
Here are reasons why our banks are troubled:
• Weak economic conditions:
Banks work within the framework of the economy. They are not buffered from weak economic conditions. India’s economy is growing at sub-5% levels, down from its peak economic growth of 9%. It is expected to grow at 5-5.5% levels in the current fiscal. It has also been battling with persistent high inflation and exchange rate volatility.
This has forced the RBI to keep key benchmark lending rates high. This not only impacts demand for loans, but also increases cost of operations for banks. Profitability of banks, thus, falls.
•
Public-sector banks:
State-owned banks dominate India’s financial sector. They account for 70% of total banking assets in India. However, the ratio of bad assets is much higher among public-sector banks than the privately-owned ones.
Also, they have greater exposure to debt-laden sectors like infrastructure. “Nonperforming loans (NPLs) and restructured loans will rise in particular at public-sector banks that lend heavily to infrastructure projects,” Moody’s said. All this has led to greater weakening of profitability than private banks.
Moreover, they are heavily dependent on the government for capital infusion. The government has budgeted Rs 14,000 crore as capital for state-owned banks. However, Moody’s expects the capital requirements to exceed this. At a time when the government is under pressure to cut expenses, it may not be able to cater to the additional needs of public sector banks.
State-owned banks dominate India’s financial sector. They account for 70% of total banking assets in India. However, the ratio of bad assets is much higher among public-sector banks than the privately-owned ones.
Also, they have greater exposure to debt-laden sectors like infrastructure. “Nonperforming loans (NPLs) and restructured loans will rise in particular at public-sector banks that lend heavily to infrastructure projects,” Moody’s said. All this has led to greater weakening of profitability than private banks.
Moreover, they are heavily dependent on the government for capital infusion. The government has budgeted Rs 14,000 crore as capital for state-owned banks. However, Moody’s expects the capital requirements to exceed this. At a time when the government is under pressure to cut expenses, it may not be able to cater to the additional needs of public sector banks.
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