Banks in 2005: Benchmarking global standards..


Par 100 posts (V.I.P)
Policy developments during 2005 indicated willingness, both on the part of the government and the banking entities, to meet the challenges of global competition and at the same time capitalise on the business opportunities and technological support. However, in parallel terms, competitive pressures and loss of market share led to banks compromising on their margins.

Nevertheless, their keenness to compete with their global peers by acquiring size and scale, setting up franchises overseas and getting overseas listing, accentuated the desire to benchmark themselves to global standards. Here, we enlist certain key aspects that highlight the sectors' focus during 2005.

Distinctive features...

One of the distinctive features of lending during FY05 was that a substantial part of the banks' lending in this fiscal was at sub-PLR rates. Such loans comprised nearly 50% of the total corporate lending by the sector. This was the result of the cutthroat competition being faced by banks and was not very reflective of the prevailing risk return tradeoff. While the RBI, in its mid-year review, highlighted the downsides of such lending, banks themselves have also contemplated fixing floor rates for long term AAA lending.

Another striking feature on the assets side was the broad-based lending to agriculture, SMEs and retail segments. While the broad-based credit disbursement is a healthy sign as far as risk diversification is concerned, it also reduces the slippage vulnerability due to sector-specific issues. The highest growth in credit offtake was registered by real estate loans at 90.3% YoY (as against a decline of 5.4% YoY in FY04) followed by retail housing at 36% YoY (10% YoY in FY04) and priority sector at 31% YoY (24% YoY in FY04).

Soundness measures...

The soundness measures for the sector were reasonably satisfying for 2005. In terms of safety mechanism, banks were able to maintain CAR of 12.8%, despite a sharp jump in the risk weighted assets. While foreign banks had the highest ratio of 14%, the PSUs were also at a comfortable 13.2%. Most private banks, however, faced capital crunch with an average CAR of 12.1%. This led to several entities tapping the capital markets (domestic and overseas) during this year. Total resource mobilisation by banks by way of domestic public issues was Rs 14.7 bn in FY05. The sector's asset quality has also shown significant improvement over the years. The net NPA to capital ratio for the sector declined from 71% in FY99 to 16% in FY05.

Based on key parameters, outlined below are some key indicators of the Indian banking industry in 2005.

§ Cost to income ratio: The cost to income ratio of scheduled commercial banks in the country hovered around 40% and was in line with their global counterparts.

§ Non-performing assets: The gross NPA to advances ratio for the sector declined from 16% in FY97 to 5% in FY05. Although this was above the range of 0.3% to 3% for the developed economies, it was well below the average of 10% for several Latin American economies. In fact, Indian banks fare much better in this respect than their Chinese counterparts (having average NPA levels of 15% to 20%).

§ Capital adequacy ratio (CAR): The sector's average capital adequacy ratio of 12.8% also compares very favourable against the regulatory minimum of 9% for global majors. Interestingly, the global range for capital adequacy ranges between 9% and 37%.

In the years to come, as global standards, measures of risk containment, deregulation and corporate governance acquire increased significance, Indian banks will have to make increased efforts to enhance their global presence. For this, it must also work on all fronts to safeguard itself from the risks associated with greater integration into global financial markets