Banks in India performed de­spite a challenging environment as the Reserve Bank of India (RBI) kept raising rates, pausing only towards the tail end of 2011. New private sector banks reported 27.6 per cent rise in net profit until the end of the second quarter, while public sector banks reported 11.6 per cent rise in profits, dented by high accretion of bad debts. Old private sector banks fared the worst at 5.5 per cent. The trend of lower profitability is expected to continue into the third quarter when the results come out by end of January. But private and public sector banks are hardly comparable in India because total advances of public sector banks at the end of the second quarter was Rs 3,19,55,572 crore, while for private banks it was a meagre Rs 66,56,361 crore.

According to RBI data, year-to-date (YTD) credit growth of 8.3 per cent (April to date) has been lower than the past seven years’ average of 11.9 per cent till the middle of December. However, average full-year growth for the past seven years has been at 24.1 per cent, which is certainly not the expectation for FY12. Hence, going by the YTD trends so far, we believe FY12 credit growth would be in the 15-17 per cent range, the apex bank said.

Diwakar Gupta, managing director and chief financial officer, State Bank of India (SBI), said, “Credit growth continues to be sluggish for the banking system. SBI will not be able to end the year even with a 16 per cent year-on-year credit growth. The investment climate has slowed down and companies are waiting for some solution to emerge for the euro zone crisis. But the tide will change and by the first quarter of the next financial year and we hope to see growth in the economy.”

The latest figures released by RBI for the fortnight ended December 16, show that credit growth moved lower to 17.1 per cent from 17.7 per cent year-on-year in the previous fortnight.

Bad debts or non-performing assets (NPAs) weighed on the banking system, especially for the private sector banks. Total bad debts of the all public sector banks was Rs 9,48,364 crore, about 42.05 per cent higher than the previous year. For new private sector banks it was Rs 1,89,181 crore, about 2.39 per cent higher than the previous year, while for old private sector banks, it was Rs 42,476 crore, about 5.51 per cent higher than the previous year. For the whole banking system, it was Rs 11,37,545 crore, about 33.46 per cent higher than the previous year.

MD Mallya, chairman of Indian Banks’ Association, said, “Banks have put up a brave front and performed well despite a difficult environment, sluggish demand for credit, high interest rates and bad loans. But banks never choked credit to industry. The bad loans were more historical as many of the public sector banks migrated to system-based NPA recognition, so bad loans that were unrecorded for many years suddenly got recognised. But, this will soon taper off.”

Sanketh Arouje, leader, economic analysis group, Dun & Bradstreet India, said aggregate profits of private banks that were considered, grew by over 20 per cent during the first three quarters of FY11. “On the other hand, growth in profit for PSBs (public sector banks) was comparatively moderate and it declined during the second quarter. The contrasting performance in the profits of public and private banks was largely because of provisioning for bad loans. While PSBs had to considerably increase their provisions during the year, private banks were able to efficiently manage them during the period,” Arouje said.

An analyst with a foreign brokerage, who cannot be quoted, said, “The typically busy credit growth season has been weak so far. The period between October and March has traditionally been the ‘busy season’ for credit disbursement activity. A large chunk (70 per cent) of the full year’s credit is disbursed in this period. The start has been weak as is evident in the moderation of year-on-year growth from 19.5 per cent as of the end of September to 17.1 per cent as of the middle of December. Year-on-year deposit growth remained broadly stable at 18 per cent.”

Even if one takes a look at the cost of funds, the deregulation of the savings bank interest rate by RBI in October threw open the possibility of the cost of funds of banks spiralling out of control. Already, smaller private banks like Yes Bank, which has the lowest savings account ratio in the industry, and Kotak Mahindra Bank have upped their savings deposit rates to 6 per cent and 7 per cent, respectively. But bigger banks, such as SBI, Punjab National Bank and ICICI Bank, have not blinked. There is now a big threat of a shift of savings bank accounts to smaller banks that are aggressively marketing their new savings bank rates.

Rajat Monga, president of financial markets, treasury group, Yes Bank, said, “Banks will have to increase their efficiencies and rake in profits because short-term rates will certainly rise. Or, they have a choice of passing it on to their customers.”

According to RBI data, term deposit growth also dipped to 20.9 per cent year-on-year, against 21.1 per cent in the corresponding period last year. The growth in demand deposits, which come with a lower cost, remained weak at a negative 3.2 per cent, but better than the negative 5.2 per cent in the corresponding period in the past year.

Dun & Bradstreet India’s Arouje said, “With the global banking system shifting from Basel II to Basel III to further strengthen risk management framework, Indian banks will need to raise additional capital to meet the stipulated requirements. The planning commission has already approved Rs 140 billion recapitalisation plan for PSBs in FY12. This is expected to strengthen and meet the tier-I capital base requirement under Basel III.”

Dun & Bradstreet in a research report said, “Moderation in IIP (index of industrial production) as well as the overall economy in recent months is expected to taper credit growth in the domestic economy. A business expectation survey conducted through Dun & Bradstreet’s Business Optimism Index for the period from October to December showed it was the second lowest level since September 2010, indicating a moderation in business activity in the coming months. Investment activity has already been on a downward trend based on an analysis of the project finance data of 33 banks from the first quarter of FY12. Consequently, income growth of banks is expected to moderate in the coming quarters.”

Banking stocks underperformed the broader market in 2011. Stocks such as IDBI Bank, Union Bank, Canara Bank and SBI plummeted 52.78 per cent, 51.21 per cent, 44.94 per cent and 42.39 per cent, respectively. Axis Bank, ICICI Bank PNB and Yes Bank plunged 40.22 per cent, 40.19 per cent, 35.84 per cent and 23.70 per cent, respectively. Federal Bank, HDFC Bank and Kotak Mahindra Bank fell 15.04 per cent, 9 per cent and 4.46 per cent, respectively. The BSE bankex was down 31.59 per cent against 24.64 per cent fall in the BSE Sensex. zz

manjuab@mydigitalfc.com