Profitability of Indian banking sector projected to decline: CII survey

17 March, 2013

The profitability of the Indian banking sector is projected to decline sharply as financial health of banks takes a hit owing to impact of stricter regulatory requirement amid rising stress on asset quality, according to a CII Survey.

The CII Survey titled ‘Health of Indian Banking sector in current regulatory environment’ assessed the prevailing market conditions vis-à-vis asset quality, capitalisation of banks and growth estimate of the banking sector while focusing on the current regulatory environment and its impact on bank business and profitability. A total of 15 banks participated in the survey including five Public Sector Banks (PSBs), thre private sector banks and seven foreign banks.

As per the survey findings, respondent banks have estimated deterioration in key performance indicators in the current fiscal (FY 2012-13) including Credit Growth, Net Interest Income, Growth in Profit After Tax (PAT) and Return on Equity. Further, banks are expected to face increased pressure on their financial health owing to stricter regulatory requirements going ahead.

On the impact of major regulatory requirements on banks’ profitability, the survey brings out that 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). Further, higher provisioning norms for restructured assets are also expected to have major impact on bank’s profitability as highlighted by the respondent banks.

Since the global financial crisis the regulatory environment for the banking sector has changed significantly globally. 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 in a statement.

Besides stricter regulatory requirements, surveyed banks foresee deteriorating asset quality as one of the most critical challenges impairing profitability of Indian banking sector. The Gross NPAs level of the Indian banking sector which was already at its highest level in last six years (as at end March 2012) is expected to worsen with significant rise in restructured loan accounts.

Raising concerns on the deteriorating asset quality of the Indian banking sector, 80 per cent of the respondent banks foresee a rise in their NPAs level while 88 per cent of surveyed banks have projected an increase in their restructured loan accounts in current financial year, which would impact the profitability of the banking sector.

With respect to the capitalization level of banks, the need for capital infusion by the government is strongly pitched by 75 per cent of the respondent Public Sector Banks (PSBs). The Capital Adequacy Ratio (CAR) of respondent PSBs has been estimated to average between 12.8 per cent as on January 1, 2013 and 8.5 per cent as on January 1, 2015.

The respondent Private sector banks are found to be maintaining an average CAR of 12 -16 per cent during the same period. On foreign banks, the survey indicates that most of smaller foreign banks are already well capitalized to meet the Basel III targets whereas big foreign banks are expected to raise their capital level through head office capital infusion.

On revised PSL guidelines, reclassification of certain advances as SME instead of agriculture and declassification of indirect financing to agriculture shall put some stress on achieving priority sector targets for agriculture. In addition, foreign banks with more than 20 branches are likely to face difficulty in meeting the increased PSL targets.