The direction of interest rates is a subject of conjecture as there are implications of RBI policy on one side and the market reality of high levels of liquidity and rigid interest rates on the other. Further, the bond market, comprising essentially of GSecs, has its own whims and may not always be in sync with the credit market. With a super-large government borrowing programme, interest rates tend to move in the upward direction, as interest rates and bond prices are inversely related. In such a situation, holders of GSecs such as banks are susceptible to market risk arising out of the mark-to-market principle when interest rates change. A solution out here is in an interest rate futures product. The RBI-Sebi report on interest rate futures (IRF) is quite appropriate in these circumstances and tries to address the lacunae in the earlier system that did not quite take off.
Just to illustrate how these instruments would work, we can think of players like banks or insurance companies with large GSec portfolios who can reduce their risk of loss by hedging their positions using IRF. Suppose we are expecting interest rates to decline in the near future, we can take a long position by buying a futures contract for delivery of the designated GSecs. If interest rates fall, the price of the underlying GSecs would go up, and the value of underlying GSec futures contract would also increase. The hedger then can benefit from the sale of the underlying GSec futures contract at a higher price. In the proposed scheme, the underlying bond would be a ten-year notional coupon bearing GSecs.
The opposite would occur when the market player is able to anticipate a rise in interest rates. The participant would short (sell) the bond futures contract, and when the rates of interest increase, the value of the GSec futures contract will fall. Hence, bond portfolios managers, banks, pension funds, insurance companies and individuals with such portfolios can hedge against raises in interest rates by selling short bonds that resemble the markup of the kind of bonds that are in their portfolio.
Interest rate futures are not a new concept in India and the OTC market is popular. Exchange-traded futures will have the advantages of transparency, trade guarantees and liquidity. In fact, RBI had introduced IRFs in 2003 which were traded on the NSE and were cash-settled with a maximum maturity of one-year. The settlement price was based on the zero coupon yield curve (ZCYC) method.
Though the volumes in the IRF initially were encouraging, they had disappeared by October 2003, due to inherent problems in the product design, regulations and accounting framework. Also banks, PDs and FIs were allowed to only hedge their held for trading (HFT) and available for sale (AFS) categories of their investment portfolio. Anecdotal feedback from the market indicated that the use of a ZCYC for determining the settlement and daily MTM price, resulted in large errors between zero coupon yields and underlying bond yields leading to wider basis risk between the IRF and the underlying. Or to use jargon, the linear regression for the best fit resulted in statistically significant number of outliers. Further, the prohibition on banks taking trading positions in the IRF contracts deprived the market of an active set of participants who could have provided the much needed liquidity.
The present design would hopefully take care of these issues as the notional ten-year bond with a coupon of 7% has been fixed. Further, the contracts are delivery-based and has been linked with securities with a maturity of between 7.5 and 15 years and a stock of Rs 10,000 cr. Hence, to a large extent the earlier deficiencies may be tackled.
However, to induce liquidity, trading positions should be permitted and the Report suggests that hedging should not be restricted to the AFS and HFT portfolios and should be extended to cover interest rate risk in the entire balance sheet. The success of this endeavour depends a lot on market participation and acceptance. The present success achieved in the currency futures market is reason for optimism here.
Tuesday, June 23, 2009
IRFs augur well for derivatives market : Economic Times: 24th June 2009
INTEREST rate futures (IRFs) are probably the last piece in the puzzle of derivatives that was missing from the menu. The need to hedge interest-rate fluctuations is immense for all participants in the financial market. And here, the purpose is to look at the extent of participation from the market. Banks and other financial institutions carry the highest-consolidated interest-rate risk on their books. This holds on the assets and liabilities side. Banks have investments in government paper of around Rs 13 lakh crore, of which 25% can be kept under the held-to-maturity bucket (HTM). The rest of the paper would be under available-for-sale (AFS) or held-for-trading (HFT) categories, which means that roughly Rs 10 lakh crore of government paper runs the risk of mark-to market (MTM) depreciation. The Reserve Bank of India’s (RBI) rules say that these losses should be booked while appreciation, when it occurs, is ignored. Hence, any increase in interest rates or excess of paper in the market will cause bond prices to fall, thus leading to losses. Even 10-bps rise in rates can lead to a theoretical Rs 1,000 crore of booking of loss. Clearly, banks would use this instrument to hedge their risk based on their individual perception of interest-rate movements. The current model proposes to allow banks to even go beyond their investment portfolio and include other components on balance sheet which are vulnerable to interest rate changes. In the past 6-7 years, it has been noticed that the interest spread of banks has come down to 4% from around 6%. Further, when lending rates come down, deposit rates are slower to adjust which affects banking margins. Therefore, they should typically be going long in the IRF market, buying bonds with the anticipation of rates moving down, which means that bond prices would increase in the future which would compensate for the potential loss on net interest income. Hence, banks should ideally do a sensitivity analysis of the potential hit on their net interest income in the event of a downturn in interest rates and accordingly invest an equivalent net income worth of securities in the market as buy position, as the notional yield has also been specified in the contract. Now, IRFs would be a very effective tool for individuals who as savers often find themselves short-charged by banks with the idiosyncratic nature of deposit rates. It often happens when individuals get into a deposit when interest rates are low and realise within three months that the rates have gone up. As flexible deposit rates do not exist, the IRF market can be tapped for this purpose. The fact that the minimum lot size is Rs 2 lakh makes it attractive. Also, since it would be only the margin that will have to be put upfront, which could be in the region of around 20%, it will not be too significant for individuals provided they are taking a call on interest rates. Hence, this will help in portfolio diversification. Maybe our policy should gear towards allowing mutual funds to float schemes that invest in IRFs which will appeal to the retail investor. Another interesting option which is open to participants in the derivatives market is that IRFs can be used effectively by players who are dealing with either commodity or forex futures. The futures prices of any product are defined as spot and cost of carry, with interest rates being the chief component. Hence, the direction and pace of movement of the futures prices in an efficient market will depend a lot on interest-rate risk which is embedded in this structure besides the underlying. Taking a view in the IRF segment will help. Let’s suppose that the investment is in, say, soybean where the futures value of contract would fall in case interest rates decline under ceteris paribus conditions leading to a notional loss. To counter this movement, the player could also go long in the IRF market and have his position covered to the extent of interest-rate risk which is embedded in any derivative product. Quite clearly, we are moving into a sophisticated system where the three markets — commodities, forex and interest rates — are getting integrated offering opportunities to cross-hedge and arbitrage to bring about all around efficiency. Therefore, this move does augur for exciting times in the derivatives market.
Not so rosy: DNA:22nd June 2009
In a rather hard-hitting comic strip on the front page of a daily newspaper, a lady shopping for her daily vegetables is aghast at the price of potatoes having doubled. The unperturbed husband says that they need not worry as the PM had just said the other day that inflation was under control. The unbridled optimism in the air around us, which is supported in its own whimsical way by the stock market movements, must make us think and reflect.We may just be living in a world of economic illusions or delusions as nothing much has really changed in the last few months to warrant such a turnaround in the confidence levels in the country. What has guided our spirits or made us feel more elated than we should be?The first myth so as to call it is that the Congress with just over 200 seats (without the support of the Left) is in a position to drive reforms forward. The Left was antagonistic to an extent on certain aspects of reforms but it was the economic crisis that slowed things down for the government. In fact Nandigram could bring back certain ghosts that may have to be faced going ahead -- all coalition partners may not think alike when it comes to reforms. There is little reason to believe that Foreign Direct Investment (FDI) will now pour into our banks and insurance companies. Or for that matter all those pending bills in Parliament would receive high priority.The second is that the economy will grow at 7 per cent this year. Economies do not grow because someone wishes it. Growth has to come essentially from the industrial sector, which has put up a dismal performance in April. In the past, growth has been at around 6 per cent at the lowest in April, so a number of 1.4 per cent does not bode well for the future. Agriculture will be a deciding factor, which is not because of any government action per se but because of climatic conditions which are uncertain. There is little solace to be had in saying that the 1.4 per cent growth heard last week is a turnaround from the negative numbers we have had in the last two months.The third distorted image is that inflation is low at 0.13 per cent and we are on the edge of a 'pleasant problem' called deflation. However, price inflation, going by the consumer price index, is actually still around 8.5 per cent. Even wholesale prices have climbed by close to 2 per cent since March end. Besides, we are being told that the economy is on the growth path while deflation is always a result of a recession. The reason why prices are down is that the government has not raised oil product prices even though global prices are increasing rapidly. Food prices remain high and global prices too have increased. This means that while the base year effect may bring down the inflation numbers, every Thursday we will still be paying more for our daily wares.The fourth concern is that our exports are declining or rather have come down for the last seven months. The fortunes of our exports are dictated by the global recovery which is now expected only in the third quarter of 2009 - not exactly a cheerful picture.
The fifth area, which is intriguing, is the budget. The government has come to power riding the clichéd troika of inclusion, infrastructure and growth. This being so, it is not possible to really go slow on expenditure for the poor, including subsidies. The private sector's exhortation on infrastructure means that the government has to spend more. Further, to placate the masses there have to be some income tax concessions, as well as excise and customs benefits. The call for high levels of disinvestment is therefore not surprising. While the government had in the past discreetly downplayed the role of disinvestment to support budgets, the issue has been proposed by the same critics who ran it down earlier. Given the limited options now available, it would be tempting to again use this route to finance the budget.Lastly, every time there is a call for lowering interest rates, it means problems for the common man who receives less money as interest on deposits. The bias between interest on deposits which is taxable, and dividend, which is tax free in the hands of the shareholder has never been addressed.In this scenario, should we really feel over-optimistic? There are two takeaways. One, conditions are actually not very different from what they were a month back. Second, even if we do choose to see rainbows in the sky, we will be more reassured if these scattered trends are sustained. Therefore, to appear positive to an extent is reasonable but with a fairly fuzzy economic picture before us, one must tarry awhile before opening the champagne.
The fifth area, which is intriguing, is the budget. The government has come to power riding the clichéd troika of inclusion, infrastructure and growth. This being so, it is not possible to really go slow on expenditure for the poor, including subsidies. The private sector's exhortation on infrastructure means that the government has to spend more. Further, to placate the masses there have to be some income tax concessions, as well as excise and customs benefits. The call for high levels of disinvestment is therefore not surprising. While the government had in the past discreetly downplayed the role of disinvestment to support budgets, the issue has been proposed by the same critics who ran it down earlier. Given the limited options now available, it would be tempting to again use this route to finance the budget.Lastly, every time there is a call for lowering interest rates, it means problems for the common man who receives less money as interest on deposits. The bias between interest on deposits which is taxable, and dividend, which is tax free in the hands of the shareholder has never been addressed.In this scenario, should we really feel over-optimistic? There are two takeaways. One, conditions are actually not very different from what they were a month back. Second, even if we do choose to see rainbows in the sky, we will be more reassured if these scattered trends are sustained. Therefore, to appear positive to an extent is reasonable but with a fairly fuzzy economic picture before us, one must tarry awhile before opening the champagne.
Saturday, June 13, 2009
Diversify Disinvestment: Financial Express: 12th June 2009
It is not surprising that at a time when fiscal constraints are dominanting government thinking, the scanner will turn to disinvestment. Let’s briefly revisit the ideology behind disinvestment. In 1991 when this idea was propagated, the objective was to broadbase equity, improve management and raise resources for the enterprise which would help strengthen the organisation. The 1991-92 Budget focused on raising resources, encouraging wider participation and increasing accountability. The limits for the so-called privatisation went through iterations with the Rangarajan Committee settling for 49% in certain non-critical sectors, which later increased. By 1999 we were talking of disinvestment in the context of helping in restructuring and reviving the PSUs. It was only after 2001-02 that this programme began to be viewed with the purpose of covering budgetary support for social infrastructure and to generate funds to reduce public debt.
Now, the question is two-fold: should we be going in for disinvestment, and if so, how should the proceeds be deployed? Disinvestment makes economic sense when we restrict our thought process to the initial motivations outlined earlier where the idea is to make the units stronger through better management practices, wider dispersal of interest and probably the introduction of the private sector ethic. However, in the face of the failure of private enterprise, particularly in banking, across the world, the undisputed superiority of a private sector model needs to be qualified. This means that we are basically discussing disinvestment in either a non-profit-making enterprise which needs better management or a profit making enterprise where the government should probably not exist, as the industry can be in the private sector. Clearly loss-making companies would not generally garner interest (Modern Foods and ITDC could be some glaring exceptions), though ideally they would be the natural choices.
The second question is about the deployment of the disinvestment proceeds. It does not appear to be prudent to use these proceeds to finance the budget. This is because it sets a precedent of moral hazard and leads to slackness in maintaining fiscal balances.
Second, divestible amounts are not infinite and hence cannot be government policy in the long run. Since the time we embarked on this programme, we have raised just over Rs 53,000 crore and this is not really substantial to make a lasting impact. Third, disinvestment should ideally be focused on the unit rather than the government. The rationale is that the moneywhich is picked up must be used by the company to grow. When an owner divests, the money belongs to him and he may not be bound to reinvest the money. However, when the entity is the government, it should ideally be used to strengthen the enterprise. In fact, disinvestment must be treated more like an IPO where the share capital remains intact and the money goes as premium to the ‘reserves account’. By diverting the funds, we would be weakening the financial position of the company as the value does not increase. In the private sector, any dilution of equity provides funds for growth and ultimately enhances the shareholders’ value. But, here, the exercise does not contribute to the company at all.
This will hold for both profit and non-profit making companies. Today, there are 160 profit-making central PSUs which can command a premium in the market. These proceeds could instead be channelled to reviving the 53 non-profit making units. Therefore, when funds are scarce for all companies in general, raising resources through alternative debt routes is expensive and disinvestment provides an effective solution.
Fourth, it is often argued that disinvestment proceeds should be used for repaying debt. While prima facie this appears to be a viable option, it has to be a concerted action to really have an impact. It has to be done at a time when these funds are not being used to support the budget, as is being done today. Lastly, there is an argument for using these funds for ‘inclusive development’ which certainly deserves deeper thought.
Now, the question is two-fold: should we be going in for disinvestment, and if so, how should the proceeds be deployed? Disinvestment makes economic sense when we restrict our thought process to the initial motivations outlined earlier where the idea is to make the units stronger through better management practices, wider dispersal of interest and probably the introduction of the private sector ethic. However, in the face of the failure of private enterprise, particularly in banking, across the world, the undisputed superiority of a private sector model needs to be qualified. This means that we are basically discussing disinvestment in either a non-profit-making enterprise which needs better management or a profit making enterprise where the government should probably not exist, as the industry can be in the private sector. Clearly loss-making companies would not generally garner interest (Modern Foods and ITDC could be some glaring exceptions), though ideally they would be the natural choices.
The second question is about the deployment of the disinvestment proceeds. It does not appear to be prudent to use these proceeds to finance the budget. This is because it sets a precedent of moral hazard and leads to slackness in maintaining fiscal balances.
Second, divestible amounts are not infinite and hence cannot be government policy in the long run. Since the time we embarked on this programme, we have raised just over Rs 53,000 crore and this is not really substantial to make a lasting impact. Third, disinvestment should ideally be focused on the unit rather than the government. The rationale is that the moneywhich is picked up must be used by the company to grow. When an owner divests, the money belongs to him and he may not be bound to reinvest the money. However, when the entity is the government, it should ideally be used to strengthen the enterprise. In fact, disinvestment must be treated more like an IPO where the share capital remains intact and the money goes as premium to the ‘reserves account’. By diverting the funds, we would be weakening the financial position of the company as the value does not increase. In the private sector, any dilution of equity provides funds for growth and ultimately enhances the shareholders’ value. But, here, the exercise does not contribute to the company at all.
This will hold for both profit and non-profit making companies. Today, there are 160 profit-making central PSUs which can command a premium in the market. These proceeds could instead be channelled to reviving the 53 non-profit making units. Therefore, when funds are scarce for all companies in general, raising resources through alternative debt routes is expensive and disinvestment provides an effective solution.
Fourth, it is often argued that disinvestment proceeds should be used for repaying debt. While prima facie this appears to be a viable option, it has to be a concerted action to really have an impact. It has to be done at a time when these funds are not being used to support the budget, as is being done today. Lastly, there is an argument for using these funds for ‘inclusive development’ which certainly deserves deeper thought.
Finding an Appropriate Exit: Financial Express: 2nd June 2009
The saga of the financial crisis continues to spill over into the manufacturing sector with GM now filing for bankruptcy under Chapter 11. The question is, what are the lessons for us in India?
Bankruptcy laws in India remain weak. Within the set of Asian nations, it was found that India, along with Indonesia, has the lowest rates of recovery and also takes the longest time for settlement. For example, in countries like Australia, Japan, Hong Kong and Singapore, such cases are sorted out within a year while the recovery rate is as high as 80-90%. In contrast, in India, the recovery rate is just 10% while it takes an average seven years for a settlement with some cases stretching beyond ten years.
The main problem relating to bankruptcy is recognition. There is quite a stigma attached to bankruptcy and companies are not willing to accept the same. Further, once recognised, companies are not willing to have a change in management unless it is absolutely essential. Also, the rehabilitation packages invariably involve reduction of costs, which includes labour, where the laws are rigid.
The banking system is most affected by rising potential delinquencies due to the large amounts of capital that are held up on this score, with NPAs being a manifestation of this phenomenon. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) empowers banks to recover their non-performing assets without the intervention of the court and this is done through securitisation, asset reconstruction companies and enforcement of security. However, there are issues here relating to the smaller units being targeted by banks. The Act views all defaulters alike without any distinction as between a wilful defaulter and a defaulter by circumstances beyond his control.
There is really a dilemma here as debtors tend to delay and prolong the process of reconciliation. Often debt is enhanced further in the name of reviving the unit or attempts are made at ever-greening. Further, political pressure could be applied to ensure that the enterprise continues operations without any interference.
Clearly, there is need to strengthen this process through better monitoring and redress. Firstly, banks need to strengthen their appraisal processes to ensure that more due diligence is done at the time of loan delivery. Secondly, it is essential to draw up early warning signals through regular follow up with the clients and have systems in place. Declining profits,...
Bankruptcy laws in India remain weak. Within the set of Asian nations, it was found that India, along with Indonesia, has the lowest rates of recovery and also takes the longest time for settlement. For example, in countries like Australia, Japan, Hong Kong and Singapore, such cases are sorted out within a year while the recovery rate is as high as 80-90%. In contrast, in India, the recovery rate is just 10% while it takes an average seven years for a settlement with some cases stretching beyond ten years.
The main problem relating to bankruptcy is recognition. There is quite a stigma attached to bankruptcy and companies are not willing to accept the same. Further, once recognised, companies are not willing to have a change in management unless it is absolutely essential. Also, the rehabilitation packages invariably involve reduction of costs, which includes labour, where the laws are rigid.
The banking system is most affected by rising potential delinquencies due to the large amounts of capital that are held up on this score, with NPAs being a manifestation of this phenomenon. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) empowers banks to recover their non-performing assets without the intervention of the court and this is done through securitisation, asset reconstruction companies and enforcement of security. However, there are issues here relating to the smaller units being targeted by banks. The Act views all defaulters alike without any distinction as between a wilful defaulter and a defaulter by circumstances beyond his control.
There is really a dilemma here as debtors tend to delay and prolong the process of reconciliation. Often debt is enhanced further in the name of reviving the unit or attempts are made at ever-greening. Further, political pressure could be applied to ensure that the enterprise continues operations without any interference.
Clearly, there is need to strengthen this process through better monitoring and redress. Firstly, banks need to strengthen their appraisal processes to ensure that more due diligence is done at the time of loan delivery. Secondly, it is essential to draw up early warning signals through regular follow up with the clients and have systems in place. Declining profits,...
it's deuce, for private and public sector banks: Financial Express 31st May 2009
Fiscal 2008-09 was a difficult time for banks as it was the second successive year of the financial crisis that engulfed the world economy. While India was partly insulated from the crisis, the meltdown was felt through capital transfers and trade, thus affecting growth. Banking became more conventional and prudential norms acquired a new dimension with income and profits being affected. To lend or not to lend is the question, as there are surplus funds but they are hard to come by.
The purpose here is to assess how Indian banks have performed in this environment, which will probably explain the current paradox. Ten leading banks have been considered here: ICICI Bank, Axis Bank, HDFC Bank, Kotak Bank and YES Bank, which are leaders in the private sector and SBI, BoB, Canara, Bank of India and Union Bank, in the public sector. They have been ranked on eight parameters.
The first set of indicators include growth in net interest income, other income and operating income to capture the operations of core banking activities. The second set of indicators are profit based and include growth in operating profit, net profit and change in net profit to total income ratio (sum of net interest income and other income). Other profit ratios such as return on assets or EPS have been excluded to avoid double counting. The third set comprises prudential indicators such as change in gross NPA and capital adequacy ratios. Capital adequacy is a tricky concept; as while a ratio higher than Basel-II recommendations is desirable, it also reflects the extent of under-banking. However, for this purpose it is assumed that higher ratios are desirable as it reflects the potential for further business expansion.
Each of the banks has been ranked on the parameters and the bank with the lowest sum of ranks is the leader.
1. The aggregate performance of public sector banks was better in terms of growth in profits. While private banks registered higher growth in NII, PSBs were better in increasing their 'other income' which comprises fee and treasury income.
2. NPAs tended to increase sharply for private banks, while public sector banks witnessed a more modest increase in this ratio. SBI, BoB and Union Bank had a decline in the gross NPA ratio.
3. Capital adequacy ratio increased sharply for ICICI, HDFC, Kotak and YES Bank,.which could be attributed to a decline in growth in assets. ICICI had actually compressed its balance sheet to improve this ratio.
4. Segment wise revenue reveals that ICICI Bank and BoB operated evenly in the wholesale, retail and treasury segments. Axis was overly dependent on treasury for its income (59%), while YES Bank focussed on wholesale (57%) and HDFC on retail (45%) banking. SBI, Canara, Bank of India and Union Bank had turned distinctly from retail to wholesale focus in 2008-09.
Tables 1 and 2 provide information on the indicators for the banks and the ranking of the same with the consolidated rank.
Based on Tables 1 and 2 it may be seen that
1. The leader in this group has been YES Bank which benefited from size as growth rates were robust due to the smaller base. The topper otherwise is Bank of Baroda which has done well on the profits and prudential areas.
2. Axis Bank at number three has done well on all fronts except operating expenses which have risen sharply.
3. The next two positions have gone to Bank of India and Canara Bank, which have both had median scores in all respects. Bank of India was however the topper in other income.
4. HDFC at number six has done well with the top line, but has fallen in the median range in case of the other parameters including expenses.
5. SBI and Canara Bank were at number seven and eight respectively, where the performance was ordinary. SBI did well in other income, while Union Bank was impressive at reducing NPAs.
6. ICICI and Kotak were disappointments in most respects. ICICI however, was the leader in lowering its expenses. Kotak had borne the brunt of both, lower growth in top line, profits and higher NPAs.
To conclude, it may be stated that NPAs or the fear of the same is one factor that could be slowing down credit today. Banks have reverted to conventional corporate banking (retail and treasury are not that attractive as before); and the focus on operating expenses underlies the compulsion of inelasticity of interest rates. Capital adequacy ratios are robust, which provide hope that lending could be better in this year. Banking surely will be quiet this year with the treasury and mortgage business taking a back-seat.
The purpose here is to assess how Indian banks have performed in this environment, which will probably explain the current paradox. Ten leading banks have been considered here: ICICI Bank, Axis Bank, HDFC Bank, Kotak Bank and YES Bank, which are leaders in the private sector and SBI, BoB, Canara, Bank of India and Union Bank, in the public sector. They have been ranked on eight parameters.
The first set of indicators include growth in net interest income, other income and operating income to capture the operations of core banking activities. The second set of indicators are profit based and include growth in operating profit, net profit and change in net profit to total income ratio (sum of net interest income and other income). Other profit ratios such as return on assets or EPS have been excluded to avoid double counting. The third set comprises prudential indicators such as change in gross NPA and capital adequacy ratios. Capital adequacy is a tricky concept; as while a ratio higher than Basel-II recommendations is desirable, it also reflects the extent of under-banking. However, for this purpose it is assumed that higher ratios are desirable as it reflects the potential for further business expansion.
Each of the banks has been ranked on the parameters and the bank with the lowest sum of ranks is the leader.
1. The aggregate performance of public sector banks was better in terms of growth in profits. While private banks registered higher growth in NII, PSBs were better in increasing their 'other income' which comprises fee and treasury income.
2. NPAs tended to increase sharply for private banks, while public sector banks witnessed a more modest increase in this ratio. SBI, BoB and Union Bank had a decline in the gross NPA ratio.
3. Capital adequacy ratio increased sharply for ICICI, HDFC, Kotak and YES Bank,.which could be attributed to a decline in growth in assets. ICICI had actually compressed its balance sheet to improve this ratio.
4. Segment wise revenue reveals that ICICI Bank and BoB operated evenly in the wholesale, retail and treasury segments. Axis was overly dependent on treasury for its income (59%), while YES Bank focussed on wholesale (57%) and HDFC on retail (45%) banking. SBI, Canara, Bank of India and Union Bank had turned distinctly from retail to wholesale focus in 2008-09.
Tables 1 and 2 provide information on the indicators for the banks and the ranking of the same with the consolidated rank.
Based on Tables 1 and 2 it may be seen that
1. The leader in this group has been YES Bank which benefited from size as growth rates were robust due to the smaller base. The topper otherwise is Bank of Baroda which has done well on the profits and prudential areas.
2. Axis Bank at number three has done well on all fronts except operating expenses which have risen sharply.
3. The next two positions have gone to Bank of India and Canara Bank, which have both had median scores in all respects. Bank of India was however the topper in other income.
4. HDFC at number six has done well with the top line, but has fallen in the median range in case of the other parameters including expenses.
5. SBI and Canara Bank were at number seven and eight respectively, where the performance was ordinary. SBI did well in other income, while Union Bank was impressive at reducing NPAs.
6. ICICI and Kotak were disappointments in most respects. ICICI however, was the leader in lowering its expenses. Kotak had borne the brunt of both, lower growth in top line, profits and higher NPAs.
To conclude, it may be stated that NPAs or the fear of the same is one factor that could be slowing down credit today. Banks have reverted to conventional corporate banking (retail and treasury are not that attractive as before); and the focus on operating expenses underlies the compulsion of inelasticity of interest rates. Capital adequacy ratios are robust, which provide hope that lending could be better in this year. Banking surely will be quiet this year with the treasury and mortgage business taking a back-seat.
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