‘Banking sector needs to worry only of domestic factors’

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Mumbai, Oct 14: Leading credit rating agency Crisil, a subsidiary of S&P, has said that the Indian banking system faced challenges in the current economic environment which has been marked by slow GDP growth, depressed capital market conditions and a relatively high interest rate regime. 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. Moreover, those Indian banks considering accessing the capital markets for shoring up capital adequacy may be forced to curtail growth plans, if the capital markets remain depressed,” said Raman Uberoi, senior director, Crisl Ratings. However the domestic banking industry is relatively insulated from the factors leading to the turmoil in the global banking industry. Further, the recent tight liquidity in the Indian market is also qualitatively different from the global liquidity crunch, which was caused by a crisis of confidence in banks lending to each other.

Roopa Kudva, managing director and chief executive officer, Crisil, said, “While the main causes of global stress are less relevant here, Indian banks do face increased challenges due to domestic factors. The banking sector faces profitability pressures due to higher funding costs, mark-to-market requirements on investment portfolios, and asset quality pressures due to a slowing economy.”