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Activity:
18 views;
last activity : 07 06 2010 20:18:09 +0000
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Liquidity woes: Partly resolved
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Asset quality: Needs monitoring
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Inflation & interest rates seen easing
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Profitability: Under pressure
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Recently, liquidity taps resembled the ones in the
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Consequent to the global events, Indian banks are also finding it difficult to raise funds from abroad, and had to rely on the domestic borrowing to pump that money for their overseas operations. The borrowing by banks from the RBI too, was also on the rise, and not enough. Consequently, the domestic liquidity tightened and manifested in call money rates soaring to as high as 23 per cent. Everyone wants the Government to intervene and the good part is that the measures (CRR cut, etc) have solved the problems, at least for the near-term, as over Rs 100,000 crore (Rs 1 trillion) worth of funds have been infused into the system.
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In a high interest rate and slowing economic growth scenario, asset quality
of banks will come under rigorous scrutiny. The retail non-performing assets
are likely to be in the uptrend, even though banks have recently pared exposure
towards retail assets to improve their asset quality.
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To add on to what Mr.Singh stated , Indian banks are well capitalised and regulated, and are seen in a better position to endure any probable increases of NPA, the situation needs monitoring as the trend could change and NPA levels may move up substantially, should there be a worsening of domestic economic conditions.
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My concern as a layman is that the inflation and interest rates are rising. The RBI had adopted a hawkish approach and maintained a tight monetary policy stance in view of the high inflation, on the back of food articles, metal and oil prices moving northwards during the year. The sharp rise of inflation by nearly three times during the last 12-15 months, had seen the RBI use tools like CRR and repo rate in order to keep a tight leash on the general interest rate environment. |
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I think all this has a direct effect on the balance sheet. The cheaper CASA
deposits are not coming easily as the depositors are showing an inclination for
term deposits, with the hike in deposit rates; evident from the lower CASA
ratio for many banks in Q1FY09. Any substantial conversion of CASA to term
deposits will increase the cost of funds for the banks, going forward, thus the
pressure on net interest margins.
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The profitability of Indian banks is expected to remain under pressure due to increased cost of borrowing, declining interest spreads, and lower fee income due to slowdown in retail lending. Profit levels are also likely to be impacted by mark-to-market provisions on investment portfolios and considerably lower profit on sale of investments, as compared with previous years. To sum up, expect margins for banks to remain under pressure for some more time.
All banks are going down because the balance sheet is not worth enough to inject more funds into the system any longer.
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