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'Banks' profits under pressure'

A Crisil study says the core profitability of banks is set to decline to 1.4 per cent in 2007-08, compared with 1.6 per cent in the previous year, reports BS Srinivasalu Reddy.

business Updated: Sep 09, 2007 23:10 IST
BS Srinivasalu Reddy

The core profitability of banks is set to decline to 1.4 per cent in 2007-08, compared with 1.6 per cent in the previous year, with the possible impact of tight monetary measures, strong credit growth and associated asset quality risks, and a continued war for resources into the medium term, a Crisil study said.

"The fluctuating fortunes are expected to continue in 2007-08, with another decline in profitability which appears to be highly likely. Banks' core profitability levels are likely to decline by 20 basis points to 1.4 per cent," said the study, Global Banking: Paradigm Shift: Managing Transition, conducted for FICCI said.

The core profitability of banks had fluctuated in recent years. During 2000-01 to 2004-05, banks' profitability margins rose to 1.83 per cent, backed by steady interest spreads, reducing operating expenses, and stable, though low fee-based incomes.

However, the trend reversed with a sharp decline in 2005-06, which was recovered marginally to 1.6 per cent in 2006-07.

"The monetary measures undertaken by the Reserve Bank of India, such as increase in the repo rates by 1.75 per cent in the last couple of years and the hike in the Cash Reserve Ratio by 2 per cent, have increased the overall cost of resources for banks. The cost of deposits witnessed a sharp increase by around 60 basis points in 2006-07," Crisil said,
"Further, excess Statutory Liquidity Ratio, now at around 30 per cent (above the mandated 25 per cent limit), is no longer sufficient to fund credit growth. Given this situation, banks scramble to mobilise deposits to fund the high-level of credit growth bound to push the cost of resources northwards in 2007-08," the study added.

Though the asset quality of banks improved over the last seven years as represented by a steady decline in the non-performing assets (NPAs), expected high credit growth both in corporate and retail segments are likely to hit asset quality.

In the face of rising corporate expansions and acquisitions and the current high-interest rate scenario, banks' corporate portfolios may face some stress. Further, considering the increasing competition in the retail asset segment and banks' quest for higher yields in retail loan segment, the study believes that gross NPAs will increase marginally.