Banks profitability may dip in 2007-08: Study

Banks profitability may dip in 2007-08: Study


New Delhi: The Reserve Bank’s tight monetary policy is likely to bring down the profitability of banks by 20 basis points during the current fiscal.

There could be a decline in the net profitability margin (a ratio of net profitability and net revenue) of banks to 1.4% in 2007-08 compared to 1.6% last year, according to a study conducted by Crisil for Ficci.

The monetary measures taken by RBI, such as increase in repo rates by 1.75% in the last couple of years and hike in cash reserve ratio (CRR) by 2%, have increased the overall cost of resources for banks, the study said.

The cost of deposits rose sharply by about 60 basis points in 2006-07, it said, adding that the decline in SLR by around 3% is no longer sufficient to fund the credit growth.

The study observed that given the situation, banks scramble to mobilise deposits to fund the high level of credit growth and the cost of resources is bound to move northward in 2007-08.

It pointed out that during 2000-01 to 2004-05, banks reported increase in profitability margins, backed by steady interest spreads, reducing operating expenses and stable but low fee-based incomes. The net profitability margin (NPM) of the banking system touched the peak level in a decade of 1.83% in 2004-05.

The study observed that a softer interest rate regime, which could be triggered either by RBI slashing repo rate or proposing a cut in the mandated SLR investments limit, could provide a breather to banks and help improve their core profitability levels.

The asset quality of the banking sector, the study said, has improved consistently over the past seven years, with a steady decline in non-performing assets, both in absolute term and as a percentage of total advances.

It also said strong credit growth may bring its own risks, and could hit asset quality.

In the current high-interest rate scenario, corporate portfolios of banks may face some stress, it said.

Besides, considering the increasing competition in the retail asset segment and most lenders being on a quest for higher yields in retail loan segment, it noted that the gross NPA and weak assets of the banking system will increase marginally.

The study said the expected capital adequacy norms will bring major changes in credit risk.