Banks need to do a fine balancing act

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: This edition of the FE-EY Best Banks Survey comes against a backdrop of turbulence in global capital markets, cautious optimism in the resilience of the Indian economy and Indian banking system, and the sustainability of its growth. However, the parameters used for the survey were outcomes of the Indian banks’ performance in a much more upbeat local and global environment. Therefore, these results should be viewed with the then prevailing conditions. Even today, most of us believe that despite recent events of Indian markets de-coupling and re-coupling to world events, the India growth story, in the medium to long term, remains intact. Thus, the Indian economy, Indian industry, and Indian banking system have come out trumps. Looking from the top down, the Indian banking industry is seen as healthy in terms of historical comparisons, despite farm loan waivers and mark-to-market losses on credit and foreign currency instruments. The industry continues to enjoy high growth rates with retail customers driving the action—but in some segments, effects of indiscreet lending are showing up. Alongside the continued high demand for personal consumption loans, the interest rates seem to be moving directionally upwards, inflation pressures are creeping in, and prices are still seen to be escalating. The aforesaid factors and the current trends in net interest margins and market and credit risk exposures seem to indicate that banks have some way to go to address these.

As ever, each genre of banks—public, old private, new private, and foreign banks, face their own unique challenges, ranging from heightened competition, compressing net interest margins, and NPAs to networks, manpower, and technology.

In terms of the future, given the effect of developed economies on India’s own growth, interest rate and foreign currency uncertainties, escalating prices, and ongoing operational challenges; managements of banks will be pre-occupied with achieving ‘a bigger bang for their buck” by focussing on margins, retaining growth levels with commensurate high returns, effectively dealing with competition through efficient financial and human capital management.

Given this current state, Ernst & Young has ranked the players within the Indian banking sector—28 public sector banks, 12 old private sector banks, 7 new private sector banks, and 9 foreign banks.