Banking: Credit & asset quality key growth drivers in FY12, says recent survey  

June 27, 2011

Growth from credit growth is expected to moderate, due to the lower GDP growth projection; Net Interest Income expected to come down, but profitability is expected to remain at a healthy 18.5% on a year-on-year basis

Moneylife Digital Team

According to a report released today by ICICI Securities, the banking industry as a whole will be able to shake off the (one-off) provision for retirement benefits and burden of the transition to system-based NPAs (Non-performing Assets) in FY11. The study also states that credit growth is expected to slow down to approximately 18%-19%, on a year-on-year (y-o-y) basis. NII (Net Interest Income) for the sample covered in the study is expected to decline from approximately 39% (y-o-y) to an estimated 16% in FY12.
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However, according to the study, the profitability of the universe selected is expected to remain healthy, at 23% (y-o-y). This is despite the constant hikes in monetary rates by the Reserve Bank of India. But ICICI Securities says that the tight monetary regime has laid stress on the cost of banking funds, NIMs (Net Interest Margins) and asset quality.

The study also maintains that private banks have performed better than their public-sector counterparts, and these government-owned lenders may face pressure due to high NPAs due to their exposure to various power and infrastructure projects.

The report says that on the cost front, there was a divergence between public-sector banks (PSBs) and their older government-owned counterparts. These banks (both PSBs and older government entities) had to bear the brunt of higher NPA provisioning; provision for the second pension option and gratuity enhancement with on-off provision for retired employees.

The official monetary policy has lowered GDP (Gross Domestic Product) projection from 8.5% (previous estimates) to the 7.8%-8.5% range. This revision, says the study, "makes us (ICICI Securities) believe that our earlier estimate of 20% credit growth has to be revised from 18%-19% with the RBI also setting a target of 19% for FY12."

The report adds: "In India, the credit to nominal GDP (market prices) is 50% as against over 100% for China and many other neighbouring economies." This factor, says the study, "depicts that the opportunity for growth in credit is enormous if economic growth stays high."

Personal loans (almost 50% of them are housing advances) have remained stable, at 18% of total non-food credit. The study also notes that commercial real estate and NBFC (non-banking financial companies) loans remain an "area of concern," under the services segment.