Productivity, recoveries key to larger profits

COMMERCIAL BANKS remain the most important component of the financial sector in India. Hence their financial health is a prime concern of observers of financial markets. The Reserve Bank of India has brought out recently the `Report on Trend and Progress of Banking in India — 20001-02.' The following is primarily based on the information provided in this report.

The 27 public sector banks (PSBs) still dominate the Indian banking sector, with the State Bank and its associates (8) contributing about 29.3 per cent of the assets, while the remaining 19 nationalised banks comprise 46 per cent of the total assets of the commercial banking segment. There were 30 private sector banks consisting of 22 old and 8 new banks. The old private sector banks are mainly regional in character and are slowly yielding ground to the new private sector banks. Finally there were 40 foreign banks operating in the country.

The aggregate deposits of SCBs during 2001-02 registered a growth of 14.6 per cent (Rs.1,40,742 crores) as compared with 18.4 per cent (Rs.1,49,274 crores) in 2000-01. The total deposits as of March end 2002 were Rs.12,02,699 crores. Time deposits continue to be the main component of deposits. On account of the paucity of safe avenues for investment, bank deposits continue to attract savers, even with the downward trend in interest rates.

During 2001-02, bank credit increased by Rs.78,289 crores (15.3 per cent) as compared to an increase of Rs.75,476 crores (17.3 per cent) during 2000-01. While food credit increased by Rs.13,987 crores (35 per cent) as compared with an increase of Rs.14,300 crores (55.7 per cent) in the previous year, the increase in non-food bank credit was Rs.64,302 crores (13.6 per cent) as compared with an increase of Rs. 61,176 crores (14.9 per cent). Total non-food credit increased to Rs. 6,17,650 crores as at end-March 2002.

Investments by banks in Commercial Paper (CPs)/shares/bonds/debentures of PSUs and private corporate sector along with bills rediscounted with financial institutions recorded a growth of Rs. 5,181 crores (6.8 per cent) during 2001-02 as against Rs.14,533 crores (23.5 per cent) in the previous year. Together with these investments, the increase in total flow of resources to the commercial sector (excluding food credit) from SCBs amounted to Rs. 69,483 crores (12.7 per cent) in 2001-02 as compared with Rs.75,709 crores (16 per cent) in the previous year. SCB investments in instruments issued by financial institutions and mutual funds increased by Rs.1,598 crores during 2001-02 as compared with Rs.1,708 crores a year ago. Including resource flow through capital issues, GDRs and those by financial institutions (FIs), the aggregate resource flow to the commercial sector was Rs.1,42,082 crores during 2001-02 as compared with Rs.1,71,124 crores in 2000-01.

Given the paucity of good credit proposals, investments of SCBs in government and other approved securities continued to record strong growth and increased by Rs.68,109 crores (18.4 per cent) in 2001-02 as compared to a rise of Rs. 61,216 crores (19.8 per cent) in 2000-01. The holding of government securities by SCBs at 36.5 per cent of their net demand and time liabilities at end-March 2002 is much higher than the statutory requirements of 25 per cent. The banking sector is slowly but steadily becoming more efficient. During the review period, there was a decline in the ratio of spread to total assets for SCBs from 2.9 per cent in 2000-01 to 2.6 per cent in 2001-02. The decline was reflected across all bank groups. For PSBs, the ratio declined from 2.9 per cent to 2.7 per cent.

Financial performance

During 2001-02, there was significant improvement in the profitability of the SCBs mainly on account of the rise in trading profits along with containment in operating expenses.

The income of SCBs increased by 14.4 per cent during 2001-02 to Rs.1,51,026 crores. This was higher than the average growth rate of 11.7 per cent registered during the period 1997-2001.

The interest income of SCBs witnessed a rise of 10.3 per cent. Despite the rise in interest income, the ratio of interest income to total assets for SCBs stood lower at 8.3 per cent as compared to 8.9 per cent in 2000-01.

Other income of SCBs witnessed a rise of nearly 41.6 per cent to Rs. 24,056 crores, showing good rise in `fee' based income and profits from trading of securities.

Since yield-to-maturity (YTM) and security price are inversely related, a fall in YTM results in an increase in security price and vice versa. The year 2001-02 witnessed a fall in YTM of more than 300 basis points and this has substantially boosted the profits of SCBs. It must also be kept in mind that banks cannot expect such a boost in profits in the coming years. The gross non-performing assets (NPAs) of SCBs stood at Rs.70,904 crores as on March 31, 2002 as compared with Rs. 63,741 crores at the end of the previous year. During the same period, net NPAs increased by 9.5 per cent to Rs. 35,546 crores from Rs. 32,461 crores. For PSBs, gross NPAs stood at Rs. 56,507 crores, comprising 79.7 per cent of the sticky loans of SCBs. The gross NPAs of new private banks witnessed a substantial increase from Rs. 1,617 crores to Rs. 6,822 crores.

As at end-March 2002, 25 out of the 27 PSBs had capital to risk-weighted assets ratio (CRAR) above the prescribed minimum level of 9 per cent. Out of this, 23 banks had capital adequacy levels in excess of 10 per cent. For PSBs as a whole, the CRAR at end-March 2002 stood at 11.8 per cent, which was higher than 11.2 per cent as at end-March 2001.

During 2000-01, of the 23 old private banks, two banks had negative CRAR, while one could not achieve the stipulated CRAR. As compared to that position, during 2001-02, out of the 22 old private banks, only one bank had a negative CRAR, while all others satisfied the prescribed CRAR. Among 8 new private sector banks, 7 banks had achieved the stipulated CRAR during 2001-02. Out of the 40 foreign banks operating in India at end-March 2002, only one bank had negative CRAR, while the CRAR of the remaining banks were in excess of the stipulated minimum level.

The large profits earned from treasury operations during 2001-02 cannot be sustained in the coming years; hence increase in net profits will have to come from improved productivity as well as recoveries. The NPA position has improved to some extent. However, it should improve further now that the Securitisation Bill has become law, and banks can move purposefully on the recoveries front. It may be added here that a gross NPA position of about $14 billion and a net NPA position amounting to $7 billion is not an insurmountable burden for the banking industry, especially if compared to some other Asian countries. However, complacency on this front is not desirable.

Overall the banking sector in India is progressing along the right lines, even though a number of shortcomings remain. The dominance of PSBs needs to be curtailed. However, it will take time for the new private sector banks to grow sufficiently to challenge the might of the PSBs. The shortage of inflows in the domestic equity market also has not helped matters. Even though RBI has announced liberalisation of FDI norms in the banking segment, some lacunae remain which hinder substantial FDI into this segment.

Commercial banks continue to feed the voracious appetite of governments by using more than one-third of their resources to buy government securities. Once demand in the economy revives, the private sector, especially industry, will demand more credit from commercial banks. Hopefully, banks will not disappoint them.