Profits of Indian banks are projected to decline sharply in the current fiscal year (2012-13) due to strict regulatory requirements and a rise in bad loans, a survey of 15 banks by the Confederation of Indian Industry (CII) has found.
“The Basel-III capital requirements are likely to have the highest impact on profitability of the Indian banking sector followed by the revised guidelines on priority sector lending (PSL),” the report titled Health of Indian banking sector in current regulatory environment said.
From an average 23% growth in 2011-12, surveyed banks have projected an increase of 14% in profit-after-tax for 2012-13.
Higher provisioning norms for restructured assets are also expected to have major impact on banks’ profitability. “Most of the respondent banks have witnessed a sharp deterioration in asset quality in the current fiscal, as reported by an increase in their NPAs (non-performing assets or bad loans) and restructured loan accounts,” said the report.
“The credit downgrade of big Indian banks is seen as a warning signal of stress on asset quality facing the Indian banking sector,” it added.
According to the Reserve Bank of India (RBI), gross NPAs of Indian banks (as a percentage of gross advances) stood at 3.1% during 2011-12 against 2.5% in 2006-07. A rapid rise in loan restructuring is another major problem of the banking sector. During the first half of 2012-13, corporate debt restructuring cell of the RBI has recorded a nearly 50% rise in proposals received for restructuring aggregate debt to R2.46 lakh crore from R1.64 lakh crore a year ago.
“Even as growth, inclusion and stability have been the key focus areas in the Indian context, the current regulatory and policy environment is critical to ensure that banks remain financially sound and profitable,” said Chandrajit Banerjee, director general, CII.