Indian banks are likely to face pressure on their earnings with financial disintermediation getting broad-based due to growth in market-based financing of the real sector, the Reserve Bank of India said in its six-monthly Financial Stability Report on Friday. The banks’ share in the flow of credit, which was around 50% in 2015-16, declined sharply to 38% in 2016-17, the RBI said. However, the aggregate flow of resources to the commercial sector was not affected due to a sharp increase in private placements of debt by non-financial entities and net issuance of commercial papers (CPs). The aggregate share of these two in the total credit flow to the commercial sector increased to 24.3% in 2016- 17.
According to data from the report, primary issuances in the corporate bond market have increased to Rs 6.7 lakh crore in 2016-17 from Rs 1.74 lakh crore in 2008-08. The secondary market activities, both in the terms of number of trades and volumes are also on the rise, with 2016-17 witnessing growth of 26% in terms of number of trades and 44% in terms of volume as compared to the previous year, the central bank said.
“These developments, although envisaged under regulatory frameworks, will have inevitable side-effects like increased competition and downward pressure on traditional earning modes of commercial banks,” the RBI said. “The need of the hour is to take this as opportunity for their business models.” Various initiatives taken by Sebi and the RBI to develop the market for corporate bonds over the last few years seem to be bearing fruit now, the RBI said.