Presentation Transcript

1. ‘Current Trends and theUnfolding of Banking Scenario’ A Krishna Kumar Managing Director & Group Executive (National Banking) State Bank of India Indian Merchants’ ChamberMUMBAI
2. Structure of the Presentation Section 1: Present State of Banking Trends in Deposits and Credit Sectoral Performance: June 2012 Performance of Banks in Q1 FY13 Section 2: Unfolding of Banking Scenario Basel III and Capital Requirement NPA and Restructured Standard Assets Falling NIM – Pressure on Banks’ Profitability Financial Inclusion – An Engine of Inclusive Growth Section 3: Way forward for Banks
3. Trends in Deposits and Credit Slowing GDP growth coupled with higher interest rates have implications for credit and deposit growth. On 10th August, 2012, the C:D Ratio 75.2% as against the benchmark of 60%. Growth rate of deposits in 2011-12 was the lowest in the last 10 years. In 2011-12, SCBs balance sheet grew at 14.5% compared to 18.8% growth in 2010-11
4. Sectoral Deployment of Credit: June 2012 Non-food bank credit grew by 18.6% in June 2012 against 19.6% (yoy) in June 2011, mainly due to slowdown in the economy, industrial production, and falling investments. Agricultural credit increased by 16.8% in June’12 against 12.8% in June’11. Credit to industry grew by 20.3% (yoy) in June’12 against 22.0% in June’11. Credit to services sector increased by 19.1% (yoy) in June’12, lower than 20.9% in June’11. During Apr-June 2012, credit growth in most of the sectors is in line with industrial growth rate. The actual impact of credit flow on sectors would reflect in subsequent quarters.
5. Performance of Banks in India in Q1 FY13 A survey by Business Line (Table); Banking business has grown at a much slower pace in Q1FY13. (Sample All banks 37, Nationalized Banks 20, New Pvt Banks 4 and Old Pvt Banks 7). Slower pace restricts the capacity of banks to raise interest rates. So, both NIM and NII are likely to be affected. As NPAs go up, banks are required to make higher provisioning, which in turn affect their bottom-line.
6. Section 2: Unfolding of Banking Scenario Basel III and Capital Requirement NPA and Restructured Assets Falling NIM – Pressure on Banks’ Profitability Financial Inclusion – An Engine of Inclusive Growth
7. A. Basel III and Capital Requirement Transition to Basel III Capital Requirement In order implement Basel III, banks need capital around: The implementation of Basel III capital requirements is proposed to be operational from 01 Jan’13 and norms will be fully implemented by 31 Mar’18. In our view, the migration to Basel-III norms will not pose any problem for banks in India, as most of the banks are well capitalized (CRAR 14.1% and Core CRAR 10.3% in Mar’12). But, to maintain 11.5% CRAR as per Basel-III may be a challenge for banks. The new rules will thus impose a burden on Government which will need to infuse additional capital into public sector banks. Alternatively, it may consider diluting its equity stake in selected public sector banks. It is expected that CRAR may fall to 12.5% in the year 2012-13 due to growing NPAs and slowdown in business.
8. B. NPA and Restructured Assets Asset Quality Deteriorating Asset quality concerns persist as the growth in NPAs accelerated and continued to outpace credit growth in FY12. Gross NPAs grew at 43.9%, far outpacing the credit growth of 16.3% in 2011-12. The divergence in growth rate of credit and NPAs could put further pressure on asset quality in the near term. The quantum of debt restructured went up from 2.7% in Mar’11 to 4.9% in Mar’12. In 2011-12, the increase in gross NPAs was largely contributed by some key sectors viz., priority sector (4.4%), retail (2.8%) and real estate (1.7%). The shares of these sectors (priority, retail and real estate) in the banking system credit is 30.6%, 18.5% and 16.7% respectively and in the banking system NPA is 47.8%, 18.3% and 9.7% respectively. Gross NPAs of scheduled commercial banks likely to increase to 3.7%-4.1% in FY13 (RBI Annual Report).
9. C. Falling NIM – Pressure on Banks’ Profitability NIM of the SCBs declined to 3.07% in FY12 from 3.14% in FY11. The fall in the NIM is possibly due to high cost of deposits in view of tightness in liquidity and inability to pass on the increased cost of funds to borrowers given subdued credit growth. RBI has raised concerns about the higher NIM, as it increases the cost of financial intermediation. A study by BCG reported that NIM is expected to be hit about 2.0% by 2020. NIM is less than 2% in countries like South Korea, Canada, Singapore, Malaysia, Germany, Australia, Spain, France and UK.
10. D. Financial Inclusion - An Engine of Inclusive Growth Financial Inclusion Measures taken by RBI and Banks Banks have covered 74,199 (99.7%) of these unbanked villageswith population above 2000 by March 2012. Now the challenge is to cover all the unbanked villages in the country. As on Mar’12, 105.5 mn no-frills accounts have been opened by banks with outstanding balance of Rs.93.3 bn. Now, RBI has mandated banks to provide ‘Basic Saving Deposit Account’ to all their customers, which covers free minimum balance and free ATM card. Banks have also introduced a General Purpose Credit Card (GCC) facility up to Rs. 25,000/- at their rural and semi-urban braches. As on Mar’12, banks had outstanding credit of Rs 27.3 bnin 1.3 mnGCC accounts. As on Mar’12, the total number of KCCs issued was as 20.3 mn with total amount outstanding of Rs 1651.5 bn. Out of the 600,000 habitations in the country, only about 30,000 had a commercial bank branch. NSSO data revealed that nearly 51% of farmer households in the country did not seek credit from either institutional or non-institutional sources of any kind.
11. Section 3: Way Forward for Banks Push Business Growth to Trend Level:Banks need to support a growing economy. Credit should grow at the level of 18-19% to achieve 8-9% GDP growth. Monitor Asset Quality: NPA is the most crucial problem among banks. To contain NPAs below 2% is still a challenge for the banks, as business environment is challenging. Capital Requirement: Indian Banks need around Rs 5 lakh crore of capital for migration to Basel III regime. This cannot be achieved without Government capita infusion. Financial Inclusion: A country of 6 lakh unbanked villages is major stumbling block to ensure financialisationof the economy. Consolidation:Bank M&A is required to increase the size of banks and improve India’s position among the Top Banks in the world, which in turn will help the corporates to raise capital from domestic markets.
12. Way Forward for Banks Competition: RBI is planning to issue new bank licenses and has issued guidelines allowing subsidiary route to foreign banks, which will intensify competition both from within and outside. Technology Development: Explosive growth in the usage of new channels (like internet banking, mobile banking) is going to characterize the next decade of Indian banking. The HR challenge: Due to a legacy of several decades, the PSBs will witness unprecedented loss of skills and competencies in form of retiring senior and middle management executives over the next few years. Infrastructure financing: During the 12th Five Year Plan (2012-17), infrastructure funding requirement has been estimated at $1 trillion. Banks have to play a major role in this area. Introducing innovative financial products (like CDS) is an efficient way to manage risks involved in the banking business. Need to review laws governing the Indian banking sector
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