Report on Indian Banking Sector  

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.

With the downturn in the economy, CARE Research expects that 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.

The report elucidates facts about the Indian Banking Sector, supplemented by latest statistical data and comprehensive analysis. The report, comprising of 16 chapters provides an in-depth view of the Banking Sector with FY09 result analysis and Statistics on banks from FY04-FY08.

• History of Indian Banking sector since inception followed by role of regulator and policy measures adopted in FY09.

• Detail study of total resources of the banks from FY01 onwards, trend in deposits mobilisation by various bank groups, low cost deposits and movements in interest rate on deposits and on competing instruments.

• Trend in credit offtake since FY01 with detailed analysis of credit offtake in FY09. Trend in sectoral credit, sensitive and priority sector lending, Industrial credit, type-wise and securitiywise credit for SCBs and for various banking groups. The report also includes bank group-wise analysis of maturity mismatch between deposits and advances.

• Analysis of trend in SLR and Non-SLR investments over the years and bank-group wise analysis of credit to deposit and investment to deposit ratio.

• Break-up of total income and its trend analysis. Comprehensive study of trend in operating cost and staff cost of the SCBs as a whole and various banking groups.

• In-depth analysis of spread and Net Interest Margins (NIMs) for banking sector and various banking groups.

• Analysis of trend in profitability for the sector and bank-groups over last 5 years including the growth drivers and factor impacting the bottomline.

• Trend in Non-performing Assets (NPAs) since year 2000 for the sector and various bank groups. Sectoral break-up of the NPAs and recovery in NPAs over the years. Detailed study of the restructuring regulations and impact on banks

• Need for high capital adequacy ratio and soundness of banking system in Indian is envisaged by presenting the trend in CAR over the years and resources raised by the banks over the years.

• Comprehensive study on the need for consolidation with in the banking industry as a viable option to sustain growth with detailed reasoning Quick analysis of FY09 results by dividing banks into PSBs and private sector banks. Analysis of trend in CASA ratio and restructured assets for FY09

• Outlook on Advances and deposit growth in FY10 and FY11 for the banking sector and various banking groups along with the detailed presentation of the methodology adopted for the projections. Outlook on investments and treasury gains, fee income for the banks, Net Interest Margins and NPAs and overall profitability going forward in FY10 and FY11.

• A section which focuses on the profile of the Top-11 players in the Indian banking sector. It includes

•  profit and loss account analysis from FY05 to FY09,

•  analysis of results of last 8 quarters i.e. Q1FY08 to Q4FY09,

•  balance sheet analysis & ratio analysis,

•  trend in shareholding pattern in the last 5 years and

• pictorial presentation of trend in NPAs in last 8 quarters.