Column : Learning to live with smaller margins

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SummaryDon’t go by the BSE Bankex which is distorted by private banks doing well—in general, banks are in deep trouble.

For close to two years now, bank stocks have turned up winners. Slice it any way—3, 12, 18 or 24 months—the BSE Bankex has left the benchmarks far behind. To be sure, much of the action has been in private sector banks—with a larger weight in the bank index—which seem to have resisted the slowdown successfully, finding niches and playing to their strengths. The public sector players, on the other hand, have been weighed down by loan losses and recasts. But, overall, business has been far from brisk and, unfortunately, could get even more dull and dissatisfying; opportunities to lend are fast slipping away as the economy remains in a trough, scaring companies away from capex. Half the banks that have reported numbers for the December 2012 quarter have been unable to grow their loan books by more than 5% since March last year.

Since industry isn’t really in a frame of mind to get going on new projects, it’s not surprising loan growth in 2012-13 so far has ticked up by less than 7%, all the more unexciting because it come off a base of just 9%. Also, while it might seem like factories are humming with activity, given companies are asking for more working capital, the truth is that the money isn’t helping turn out more produce but is merely funding bigger inventories. If assets aren’t coming their way, the liabilities too are proving to be a challenge. Bankers are watching in dismay as customers leave less cash lying in current and savings accounts (CASA) because they’re paying more for the same basket of goods; the ever-reliable, sticky CASA is turning fickle, growing at barely 2%, nowhere close to the 35% seen in late 2010 or even the decent 15% in mid-2012.

There’s hope yet, predicated on an upturn in the economy that will encourage borrowing as interest rates fall. Some of this has, no doubt, begun to play out; lower headline and core inflation allowed the Reserve Bank of India (RBI) to trim policy rates in late January. The response, a grudging 5-25 basis points cut in base rates,

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