Risk taking may be the theme song of the banking sector, but banks were bogged down by the flip side of it last year. Non-performing assets, better known as NPAs, dominated the banking narrative for much of the last six months of 2012.
The much awaited passage of the Banking Regulation (Amendment) Bill expected to be issued by the Reserve Bank of India -- which will pave the way for new banking licences --, afforded some reprieve towards the end, along with rumours of takeover bids on old private sector banks by new private sector banks.
A senior analyst says that banks are mainly to be blamed for the NPA problem. "No doubt, the problem arose out of the macro-economic environment in the country and beyond," says Shinjini Kumar, Director, PricewaterhouseCoopers Pvt Ltd. It brought about greater focus on governance issues, both within borrowers and lenders.
"Weaknesses in processes such as appraisal of loans, selection of borrowers and ongoing monitoring of loans may not show up when the economy is booming and the rising tide effect persists. But when the economy is in a downturn, these things are accentuated and that's what happened." Another industry expert at KPMG has a similar view. "Banks obsessed with topline growth do well when there is a boom, but when the slowdown sets in, such banks are hit hard," says Narayanan Ramaswamy, Partner, KPMG Advisory Services Pvt Ltd. He adds that bankers with "banking instinct", who can protect their capital and invest their assets wisely wouldn't encounter such problems.
With the economy showing no decisive signs of recovery as indicated by core sector numbers for the April-November 2012 period, NPAs will continue to stress banks in 2013 as well, though managing director of public sector lender State Bank of Mysore, Sharad Sharma, disagrees: "NPAs won't be as bad a story as in 2012. At our bank, we saw significant reductions in the last two quarters of calendar 2012." The MD and CEO of Karur-based private sector lender Lakshmi Vilas Bank, K S R Anjaneyulu, says that banks with a legacy of stressed assetes will find the going tough in 2013 and fiscal 2013-14.
According to him, growth prospects for such banks would be bleak, while the rest will do well. "I feel that overall growth for the banking sector will be in the region of 17-20 per cent in 2013-14." He adds that given the easing of the fiscal cliff challenge in the US and the Eurozone crisis, the global economic situation augurs well for banks and that by March this year, the "difficult phase" for the sector should be over.
Deposits Growth Likely
According to Sharma, the mismatch between credit growth at around 16 per cent and deposit growth of about 13 per cent in calendar 2012, is bound to see improvement in 2013. "Deposit growth will be around 16 per cent this year led by retail deposits, even as we phase out bulk deposits. This will improve liquidity, which gave bankers a tough time in 2012." On the credit growth front, Sharma notes that with interest differentials being what they are, corporates will continue to prefer external borrowings.
"To that extent, there won't be significant pickup in corporate credit." He is optimistic on the retail side.
While the clutch of new players entering the banking space is perceived as a positive development for the sector, Shinjini says this will come with its own set of challenges.
"The competition landscape in the banking sector may change in the medium to long term, primarily in response to the changing economy. Post-liberalization growth in India received a boost from services and IT/ITES, while private sector banks licensed post-liberalization particularly benefited from the emergence of the middle class and the aggressive growth strategies of large corporates."
Private sector banks, including HDFC Bank, Global Trust Bank (GTB), ICICI Bank and Axis Bank took advantage of the first phase of relaxation in banking licence norms, followed by Yes Bank and Kotak Mahindra Bank in 2003-04. However, GTB was forced to merge with public sector lender Oriental Bank of Commerce after unduly high exposure to the stock markets led to its fall. Others managed to leverage the India growth story well to drive growth and business.
However, this will be hardly the case for new players, as and when they come, Shinjini says. "New banks will have to contend with the slowdown in these sectors and can no longer bank on the same theme to drive growth. They will have to build successful business models by driving entrepreneurship, and focusing on the 'emerging middle class', especially in Tier II and III towns and cities. Financial inclusion will also provide them opportunities if they can build a sound business case around it." Ramaswamy feels that going forward, banks that focus on SME lending will fare well without having to bother much about NPAs. According to him, the ability to keep down transaction costs will hold the key to driving bottomline growth for banks.
More Players
On new players entering the banking sector, Sharma says that given the long gestation process, any possibility of a new player entering the banking sector this year is unlikely. It's a view shared by Ramaswamy as well.
Mergers and acquisitions (M&As) will be a recurring theme in 2013, according to Shinjini and Sharma. "I do expect M&As to happen in a calibrated way in the long term, but no quick consolidation," says Shinjini. The rumours won't die down, but there won't be M&As as such, says Anjaneyulu. "Old private sector banks want to grow on their own strength.
They have been playing a vital role in their own way," he says. The macro-economic situation is bright, according to Shinjini, given the demand for goods and services which is not adequately backed by supply. "This is a country where there are queues for everything. So demand is there. If we can address policy issues, the supply side will pick up and thus lead to buoyancy in growth." Anjaneyulu says that given the empirical evidence that corporate credit grows at 2.5 times the GDP growth of a country, the credit growth rate should hover around 15 per cent.
On the possibility of a rate cut by the central bank this month, the bankers say this could indeed be expected. Anjaneyulu notes that after the Centre's positive moves on reforms and fiscal management, the Reserve Bank of India is likely to reciprocate favourably with a repo rate cut. Shinjini also wants to be in sync in with such a possibility, saying, "I have no reason to be a contrarian."
The much awaited passage of the Banking Regulation (Amendment) Bill expected to be issued by the Reserve Bank of India -- which will pave the way for new banking licences --, afforded some reprieve towards the end, along with rumours of takeover bids on old private sector banks by new private sector banks.
A senior analyst says that banks are mainly to be blamed for the NPA problem. "No doubt, the problem arose out of the macro-economic environment in the country and beyond," says Shinjini Kumar, Director, PricewaterhouseCoopers Pvt Ltd. It brought about greater focus on governance issues, both within borrowers and lenders.
"Weaknesses in processes such as appraisal of loans, selection of borrowers and ongoing monitoring of loans may not show up when the economy is booming and the rising tide effect persists. But when the economy is in a downturn, these things are accentuated and that's what happened." Another industry expert at KPMG has a similar view. "Banks obsessed with topline growth do well when there is a boom, but when the slowdown sets in, such banks are hit hard," says Narayanan Ramaswamy, Partner, KPMG Advisory Services Pvt Ltd. He adds that bankers with "banking instinct", who can protect their capital and invest their assets wisely wouldn't encounter such problems.
With the economy showing no decisive signs of recovery as indicated by core sector numbers for the April-November 2012 period, NPAs will continue to stress banks in 2013 as well, though managing director of public sector lender State Bank of Mysore, Sharad Sharma, disagrees: "NPAs won't be as bad a story as in 2012. At our bank, we saw significant reductions in the last two quarters of calendar 2012." The MD and CEO of Karur-based private sector lender Lakshmi Vilas Bank, K S R Anjaneyulu, says that banks with a legacy of stressed assetes will find the going tough in 2013 and fiscal 2013-14.
According to him, growth prospects for such banks would be bleak, while the rest will do well. "I feel that overall growth for the banking sector will be in the region of 17-20 per cent in 2013-14." He adds that given the easing of the fiscal cliff challenge in the US and the Eurozone crisis, the global economic situation augurs well for banks and that by March this year, the "difficult phase" for the sector should be over.
Deposits Growth Likely
According to Sharma, the mismatch between credit growth at around 16 per cent and deposit growth of about 13 per cent in calendar 2012, is bound to see improvement in 2013. "Deposit growth will be around 16 per cent this year led by retail deposits, even as we phase out bulk deposits. This will improve liquidity, which gave bankers a tough time in 2012." On the credit growth front, Sharma notes that with interest differentials being what they are, corporates will continue to prefer external borrowings.
"To that extent, there won't be significant pickup in corporate credit." He is optimistic on the retail side.
While the clutch of new players entering the banking space is perceived as a positive development for the sector, Shinjini says this will come with its own set of challenges.
"The competition landscape in the banking sector may change in the medium to long term, primarily in response to the changing economy. Post-liberalization growth in India received a boost from services and IT/ITES, while private sector banks licensed post-liberalization particularly benefited from the emergence of the middle class and the aggressive growth strategies of large corporates."
Private sector banks, including HDFC Bank, Global Trust Bank (GTB), ICICI Bank and Axis Bank took advantage of the first phase of relaxation in banking licence norms, followed by Yes Bank and Kotak Mahindra Bank in 2003-04. However, GTB was forced to merge with public sector lender Oriental Bank of Commerce after unduly high exposure to the stock markets led to its fall. Others managed to leverage the India growth story well to drive growth and business.
However, this will be hardly the case for new players, as and when they come, Shinjini says. "New banks will have to contend with the slowdown in these sectors and can no longer bank on the same theme to drive growth. They will have to build successful business models by driving entrepreneurship, and focusing on the 'emerging middle class', especially in Tier II and III towns and cities. Financial inclusion will also provide them opportunities if they can build a sound business case around it." Ramaswamy feels that going forward, banks that focus on SME lending will fare well without having to bother much about NPAs. According to him, the ability to keep down transaction costs will hold the key to driving bottomline growth for banks.
More Players
On new players entering the banking sector, Sharma says that given the long gestation process, any possibility of a new player entering the banking sector this year is unlikely. It's a view shared by Ramaswamy as well.
Mergers and acquisitions (M&As) will be a recurring theme in 2013, according to Shinjini and Sharma. "I do expect M&As to happen in a calibrated way in the long term, but no quick consolidation," says Shinjini. The rumours won't die down, but there won't be M&As as such, says Anjaneyulu. "Old private sector banks want to grow on their own strength.
They have been playing a vital role in their own way," he says. The macro-economic situation is bright, according to Shinjini, given the demand for goods and services which is not adequately backed by supply. "This is a country where there are queues for everything. So demand is there. If we can address policy issues, the supply side will pick up and thus lead to buoyancy in growth." Anjaneyulu says that given the empirical evidence that corporate credit grows at 2.5 times the GDP growth of a country, the credit growth rate should hover around 15 per cent.
On the possibility of a rate cut by the central bank this month, the bankers say this could indeed be expected. Anjaneyulu notes that after the Centre's positive moves on reforms and fiscal management, the Reserve Bank of India is likely to reciprocate favourably with a repo rate cut. Shinjini also wants to be in sync in with such a possibility, saying, "I have no reason to be a contrarian."