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Are Indian Banks Ready for Crisis Part II?
At a time when the global economy is heading towards another financial crisis, perhaps even worse than the one that hit the world in 2008, Indian banks are grappling with issues like moderating credit growth, rising slippage ratio and mounting credit cost. can they weather the rising storm?
Issue Date - 10/11/2011
Indian banks, the dominant financial intermediaries in the country, have evolved dramatically over the last few years. And it is evident from several parameters, including credit growth, profit margins, and trend in gross non-performing assets (NPAs). While the annual rate of credit growth clocked 23% during the last five years, profitability (average return on net worth) was maintained at around 15% during the same period. Even gross NPAs fell from 3.3% as on March 31, 2006 to 2.3% as on March 31, 2011. Good internal capital generation, reasonably active capital markets, and governmental support also locked up better capitalisation for most banks during the period, with overall capital adequacy touching 14% as on March 31, 2011. At the same time, high levels of public deposits ensured that most banks had a comfortable liquidity profile, so much so that they even weathered the 2008 global financial comfortably. So far, so good. But, at a time when the US is grappling with serious debt issues (US public debt stands at a whopping $14.618 trillion, about 103% of its GDP), and the nations in the Eurozone are bowing to sovereign debt crisis, one by one (first Ireland, then Greece and Portugal), can Indian banks remain afloat? What about factors like moderating credit growth, rising slippage ratio and mounting credit costs? Aren’t these enough to derail the Indian banking system and place it alongside its European counterparts that are finding it hard to stay grounded in an environment which is perhaps even worse than that of 2008, courtesy the sovereign debt crisis?

For the uninitiated, the Indian financial sector (including banks, non-banking financial companies, or NBFCs, and housing finance companies, or HFCs) reported a compounded annual growth rate (CAGR) of 19% over the last three years and their credit portfolio stood at close to Rs.49 trillion (around 62% of FY2010-11 GDP) as on March 31, 2011. While NBFCs accounted for about 10% of the total credit, and HFCs for around 4%, those were banks that dominated the scene accounting for nearly 86% of the total credit. In fact, total banking credit stood at close to Rs.39 trillion as on March 31, 2011 and reported a strong 21.4% growth in FY2010-11, led by credit to the infrastructure sector and to NBFCs.

But, as the global environment turns grim and the Indian economy too starts feeling the pinch (India’s real GDP moderated for the third consecutive quarter, rising 7.7% yoy in Q2 2011, down from a 7.8% yoy rise in Q1 2011), India’s so-far-insulated banking system is about to face several challenges in the near future, which include increase in interest rates on saving deposits, a tighter monetary policy, a large government deficit and implementation of Basel III norms. In fact, the deceleration of the Indian economy in the context of the global financial turmoil and an increasingly bleak economic outlook coupled with rising delinquency rates (number of past-due loans divided by the total number of current loans), has highlighted the potential for a weakening in the asset quality of Indian banks.

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