‘PSBs have shown consistent improvement in recent times’

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Monday , March 24, 2008 at 0215 hrs of Baroda has given sufficient thought to this issue. However, the “process” just cannot take place itself for PSBs. It does require legal changes like in the Banking Regulation Act and State Bank of India Act, etc. Unless these legal barriers are removed, no PSB can go ahead with its merger plan.

In the days of credit deceleration and rising cost of resources, do you think profits of the banks will take a hit and NPAs will rise?

A: Not at all. Profits are primarily the function of net interest margins (NIM), which banks earn as well as the non-interest income which they derive from treasury operations, fees, third party product distribution, etc. If banks price their deposit and loan products properly, even in a decelerating credit environment they can achieve a good level of NIMs. Given the buoyancy in financial markets, banks are well poised to increasing their earnings through treasury gains as well as fee-based income. Like in FY07 and FY08, banks are in a good position to maintain the earnings momentum in FY09 as well, provided they price their products smartly.

NPAs too need not rise if banks have proper due diligence system in place and if their boards/top managements do not allow excessive exposures to overheated sectors for want of short-term gains.

Do you think the private sector banks have fared better than the PSBs in recent times? If it does not merge with its associates, even SBI will be in danger of losing its leadership position…

This is too far-fetched. One sees consistent improvement in the performance of PSBs across all parameters in recent times. For instance, their gross profits as a percentage of total assets has improved from 1.34% in 2000-01 to 1.73% in 2006-07. Operating expenses as a percentage of total assets have come down from 2.72% in 2000-01 to 1.77% in 2006-07. Net NPAs as a percentage of total assets have also come down from 1.93% in 2002-03 to 0.62% in 2006-07. CRAR has improved from 11.20% in 2000-01 to 12.36% in 200607.

The only area where they are weaker compared to their private peers is the area of “fee-based” income. However, this weakness will not continue for very long as many of them have proactively selected partners for life insurance, asset management business, etc. in recent times. This, accompanied with their migration to new platforms, has opened up many new avenues for them to generate fee-based incomes.