Rising competition and inflationary pressure will remain major challenges

Global research firm Standard & Poor's (S&P) on Monday predicted that Indian banks were poised for another good year during 2011-12, riding on the back of good economic growth, favourable demographics and under-penetration.

However, it stated that rising competition, inflationary pressure and risk management practises will remain major challenges for the banking sector during the year. These observations are part of its latest industry report card titled ‘Indian banks are likely to ride an economic growth wave.'

“We expect the sector's asset quality to improve in view of the economy's sound performance. The banks could also benefit from limited loan concentration and India's lower leverage than other Asian countries in terms of a ratio of overall credit to GDP,'' S&P credit analyst Geeta Chugh said.

The report said earnings pressure on banks eased during last fiscal, while the introduction of a base lending rate — which established a floor lending rate — also boosted profitability of the sector. In addition, rising interest rates helped banks. “Indian banks are benefiting from the economy's sound growth, favourable demographics, and under-penetration. But high inflation, increased competition and evolving risk management practices will remain key challenges,'' S&P report said.

While the country grew by 8.5 per cent last fiscal and the government expects the growth momentum to continue this year as well, over half of the country's population is below the age of 30 years and are a major target group for banks. The penetration of banking services in the country still remains low and the government has set targets to provide banking facilities to all habitations having a population of over 2,000 by March, 2012.

The non-performing loan ratio of Indian banks was about 2.6 per cent in 2010-11 and S&P said it expected the numbers to fall this year. To support capitalisation, the government injected Rs.23,200 crore into state-owned banks in the last three fiscals.

“We expect the sector's asset quality to improve in view of the economy's sound performance. Overall earnings are likely to be stable as lower credit costs offset a dip in margins,'' it said.

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