Banks: too much capital, little lending: Financial Express: 17th August 2009

The performance of the banking sector in the first quarter of this year has been quite impressive in terms of growth in the top and bottom lines. However, there are two interesting facets which emerge from the numbers presented by them. The first is that there is a difference in the performance of the public sector and private banks and the second is that there is some concern in the areas of impaired assets and, ironically, excess capital. Overall performance was impressive with profits surging by 64.4% for a set of 40 leading banks—25 public sector, 6 new private and 9 old private banks. There are some interesting features. The first is that total income has been aided mainly by the surge in other income, which is primarily treasury income as fee based activity has been on the downswing ever since the financial crisis of 2007. The ratio of other income to interest income increased from 14.3% to 18.8% showing hence a higher reliance on other income. Secondly, net interest income had come under pressure with interest expenses rising faster than interest income. This has been a major concern for banks as they have had to lower their PLR with successive reductions in the reverse repo and repo rates and CRR cuts. This has not been compensated by lower deposit rates, which have been benchmarked to the small savings rate which still delivers 8% nominal return, which could be tax exempt. The third is that the most impressive performance has been put up by the public sector banks in all the top line indicators relative to the private banks. The new private banks, excluding ICICI Bank, have done better than the old private banks. The fourth is that ICICI Bank has adopted a different approach to banking. It has shrunk its balance sheet. This is a conscious policy pursued by the bank, which is also visible when one visits the bank branch. The staff encourages customers to withdraw deposits and invest in insurance products. This has been done on both the deposits and credit sides. The expense bill too has come down with both salary and non-salary based expenses coming down in this quarter.
The fifth is that non-performing assets have increased quite steeply in all banks both at the gross and net levels. It is significant as the rate of growth of the impaired assets is higher than that of the lending portfolio. The gross non-performing assets ratio has remained unchanged for public sector banks at 2.09 while it has increased for new banks to 3.06 from 2.65% and from 2.6% to 2.64% for old private banks. This is a worry because it reverses a trend observed earlier of a decline in this ratio over the years. In fact, Development Credit Bank (2.84% to 10.86%), ICICI Bank (3.72 to 4.63%) and Kotak Bank (3.17% to 4.95%) were the ones with high ratios. The public sector banks had controlled this ratio to less than 3%. For all banks put together, this ratio increased in 9 of the 25 public sector banks, 5 out of 6 new private banks and 4 of the 9 old private sector banks. Growth in non-performing assets is linked with overall performance of the borrowers, industry in particular. With low growth in industry there is an inherent tendency for delinquencies to increase, which is also possible this year with the drought and a possible slowdown in industry lingering. Another feature of the performance is the capital adequacy ratio. Banks have tended to increase this ratio, which is both a blessing and a concern. It is a blessing to know that the banks are well-capitalised and hence future expansion is possible without there being any impediments. However, it is also a concern because high ratios indicate that capital is not being efficiently utilised. Against the Basel norm of 9%, there were several banks which had a ratio of over 15%— 5 out of 6 new private banks and 1 old private bank. The public sector banks had ratios in the double digit range. This is also reflected in the growth in loan portfolio (where the NPA ratios and amount have been used to extrapolate the asset size). Public sector banks have been more active in increasing the loan portfolio relative to the private banks. Therefore, the overall picture when looked at from beyond profits is a bit disconcerting with net interest income being under pressure, too much dependence on other income, non-performing assets growing across banks and banks being over-capitalised —not the way the ideal results profile should look like.