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A tale of two banking sectors

A tale of two banking sectors
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First Published: Wed, Aug 31 2011. 09 52 PM IST
Updated: Wed, Aug 31 2011. 09 52 PM IST
It’s a tough time being a public sector bank. The BSE Bankex has lost 18% since the start of this fiscal year; but 17 state-owned banks have fared worse. The June quarter results show us why.
In the three months ending June, profits for public sector banks (excluding State Bank of India, or SBI) were down 4% from a year ago compared with the 25% growth for private banks, according to Citigroup Global Markets Inc.’s estimates. Similarly, public sector banks’ net interest margins fell by an average 30 basis points from a quarter ago, while their loan-loss provisions increased 44%, both significantly more than their private sector counterparts. SBI had worse numbers.
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Sure, times are difficult for the banking sector as a whole with slowing credit growth, hikes in interest rates and rise in non-performing assets. However, public sector banks have additional pressures to deal with, mostly concerning asset quality.
For one, state-owned banks’ non-performing advances rose significantly because of a move to an automated system of recognizing bad loans. The full impact of this technology change will show only in the coming couple of quarters as they complete the transition.
Secondly, all indications are that the Reserve Bank of India will hike interest rates further when it meets to review monetary policy in another two weeks. While the full impact of rising lending rates will show with a lag, it could put further pressure on asset quality, especially loans to small and medium enterprises (SMEs).
Another round of rate hikes would lead to an inability among small companies to repay loans, said a survey done by the Associated Chambers of Commerce and Industry of India in early August. Advances to this sector account for some 11% of the country’s bank credit, mostly lent by state-owned lenders.
Now, the government wants public sector banks to restructure loans by extending their repayment periods, the Business Standard reported. A Mint story pointed out that banks may be even asked to inject fresh funds into distressed SMEs.
A case of throwing good money after bad? Be that as it may, the bottom line is that state-owned banks will have to set aside more money, hurting their profitability. This underperformance is going to continue for some more time.
Graphics by Sandeep Bhatnagar
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First Published: Wed, Aug 31 2011. 09 52 PM IST