Indian banks: going beyond the current crisis

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: The second quarter earnings season for corporates is just around the corner. However, in the case of the banking industry, the quarter is expected to reflect harsh realities of a tight monetary policy era.

While the Reserve Bank of India (RBI) is yet to achieve its policy goals in terms of credit growth (target of 20% against the actual growth of 26%) and money supply (target of 16-17% against an actual growth of 20%) after effecting a series of hikes in cash reserve ratio (CRR) and repo rates, analysts caution that banks’ vital performance parameters have already started showing pressure.

The condition of India’s macro-economy as well as the banking sector remains weak with inflation hovering around the 12%-mark, the rupee weakening against the dollar, the fiscal deficit widening and persistent fears of an economic slowdown. All this translates into myriad concerns pertaining to the visibility of banks’ earnings growth. Further, the dislocation in global financial space has resulted in bankruptcy of major investment banks like Lehman Brothers Holdings or the sell-out of Merrill Lynch, Wachovia and Washington Mutual.

Concerns over profitability and worries over the quality of assets of banks are on rise, especially after the recent hardening of lending rates. The ongoing monetary tightening by the RBI also threatens to result in higher delinquencies and hence higher provisioning.

For the PSBs, there is the additional concern regarding the potential change in the repayment behaviour of agri-borrowers following the announcement of the farmer loan waiver scheme. Therefore, the quality of banks’ assets will remain at the centrestage and will be keenly watched in the second quarter.

The RBI has raised the CRR, the portion of deposits that banks maintain with the central bank as reserves, by 400 basis points to 9% since December 2006 to contain inflation. In a bid to soften the impacts of the global financial turmoil, the RBI, in tandem with other central banks of developed nations, announced measures to boost the supply of dollars in the market and curb exchange-rate swings in September. The central bank assured it would sell dollars and raise rates on locally-held foreign-currency deposits.