Abstract
Indian Banking sector is dominated by Public sector banks (PSBs) which
accounted for 72.6% of total advances for all SCBs as on 31st March 2008. PSBs
have rapidly expanded their foot prints after nationalisation of banks in
India in 1969 and further in 1980. Although there is a restrictive
entry/expansion for private and foreign banks in India, these banks have
increased their presence and business over last 5 years.
Peculiar characteristic of Indian banks unlike their western counterparts such
as high share of household savings in deposits (57.4% of total deposits),
adequate capitalisation, stricter regulations and lower leverage makes them
less prone to financial crisis, as was seen in the western world in mid FY09.
The Scheduled Commercial Banks (SCBs) in India have shown an impressive growth
from FY04 to the mid of FY09. Total deposits, advances and net profit grew at
CAGR of 19.6%, 27.4% and 20.2% respectively from FY03 to FY08. Banking sector
recorded credit growth of 33.3% in FY05 which was highest in last 2 and half
decades and credit growth in excess of 30% for three consecutive years from
FY04 to FY07, which is best in the banking industry so far. Increase in
economic activity and robust primary and secondary markets during this period
have helped the banks to garner larger increase in their fee based incomes.
A significant improvement in recovering the NPAs, lowest ever increase in new
NPAs combined with a sharp increase in gross advances for SCBs translated into
the best asset quality ratio for banking sector in last two decades. Gross
NPAs to gross advances ratio for SCBs decreased from the high of 14% in FY2000
to 2.3% in FY08.
With in the group of banks, foreign and private sector banks grew at higher
rate than the industry from FY03 to FY08 primarily because of lower base
effect and rapid expansion undertaken by these banks. In FY09, overall growth
in credit and deposits was led by PSBs. However, growth of private and foreign
banks was significantly lower in FY09 due to their high exposure to stressed
sectors and problem at parent level for foreign banks.
Unsecured bank credit has risen over the years and stood at 23.3% of bank
credit in FY08 as compared to just 10.9% in FY2000. Lending to sensitive
sector has also grown at CAGR of 46.1% from FY05 to FY08. In the backdrop of
the economic downturn, CARE Research feels that the excellent performance seen
in last five years ended FY08 will be difficult to repeat in coming years.
CARE Research expects that with the downturn in the economy, credit and
deposit growth will moderate in coming years. Credit growth will be led by
spending on the infrastructure while retail credit will show a moderate
growth. Margin pressures due to lag effect of rate cuts between interest rate
on deposits and advances, lower treasury gains and core fee income and
increasing in provisions for NPAs is likely to put pressure in the bottom line
of the banks.
Going forward, PSBs' which are close to the required lower level of government
stake and have concentrated presence in particular region are likely to
consider its merger with other PSB as an important option if they want to
sustain the growth seen in past.
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