India’s economic development and financial sector liberalization have led to a transformation of the Indian banking sector over the past two decades
Asset quality and profitability have improved significantly and the system has become more commercially oriented.
Indian banks were not much impacted by the financial crisis, helped by their relative isolation and some counter-cyclical measures implemented by the Reserve Bank of India in the mid-2000s, but asset quality deterioration led to some proactive loan restructuring
Over the past year Indian banks have encountered more headwinds as high inflation led to tightening monetary policy, putting pressure on borrowers, especially in weaker sectors.
Funding and liquidity are relatively strong features of the Indian banking system as the Loans/Deposits ratio is under 80% and the banks are required to hold large amounts of Indian government bonds. Their access to offshore funding is constrained by India’s just investment grade sovereign rating.
Capital is also adequate in aggregate but some banks, including large Public Sector banks, are in need of core capital.
Performance of Banks in 1HFYE2012
Asset quality deteriorating, especially for the Public Sector Banks, notably State Bank of India, due to its more extensive lending to small businesses and farmers.
Impairment charges up YoY for the larger Public Sector banks; more stable or even lower for the leading Private banks.
Some slippage seen as Restructured Loans become NPAs but most still classified as performing.
Profitability remains good at the Private banks and moderate at the PSB’s, despite the impairment charges. The slowing Indian economy with still high inflation and interest rates suggests credit quality will continue to weaken.
Deposit funding strong at most banks but borrowings inside and outside India still relatively high at ICICI.
Capital ratios look adequate overall, but some banks need more common equity to keep their Tier 1 ratios above 8% and potentially comply with Basel 3. The need for the government to invest to maintain its shareholding in Public Sector Banks is a constraining factor.
Download the report here Part 1/ Part 2
This report has been published by CreditSights Asia Financial Services team on the Indian banking system.
Report is divided in 2 parts. In part one, recent trends in the Indian banking sector, taking a look at the performance and soundness of the banking sector as well as regulatory developments in the context of the broader economic environment.
In part two, the performance in 1HFYE 2012 of the banks has been discussed.
