The BSE Bankex continues to remain strong despite the fact that the yield on the 10-year benchmark bond has moved past 8% and is likely to climb higher. But investors don?t appear to be concerned about an erosion in banks? portfolios; among all sectors, FII exposure to bank stocks is the highest. Moreover, the market capitalisation of banking stocks is Rs 5.3 lakh crore to the total market capitalisation of Rs 60 lakh crore, a significant share.
But that?s not really surprising because the economy is in robust health as indicated in the strong IIP numbers for January at 16.7% and ultimately banks are a play on the economy. McKinsey points out that banking index has grown at a compounded annual rate of over 51% since April 2001 against 27% growth in the market index for the same period.
As of now, credit growth is clearly picking up?net non-food credit offtake for the fortnight ended February 26, 2010 hit the 16% mark?and bankers confirm they?re seeing more individual and SME borrowers than they were entertaining six months ago. Interest rates may be heading up, given that inflation is now nudging double digits at 9.8% for January, but they?re nowhere out of control yet and unlikely to keep customers away. With non-performing assets under control and deposits growing at around 16% year-on-year, everything seems to be going well for the sector just now. But, with all this, the sector may not realise its full potential.
Taking a look at how events in the space could unfold in 2010, McKinsey observes that depending on the actions of policy makers and bank managements, the outcomes could be dramatically different. In other words, the cost of inaction or insufficient action will be high. Specifically, the consultancy firm observes that at one extreme, the sector could account for over 7.7%of GDP with over Rs 7,500 billion (Rs 7.5 lakh crore) in market capitalisation while at the other, it could account for just 3.3% of GDP with a market capitalisation of Rs 2,400 billion (Rs 2.4 lakh crore).
Dwelling further on the subject, McKinsey notes that banking sector intermediation, as measured by total loans as a percentage of GDP could grow marginally from its current levels of 30% or it could grow dramatically to over 100% of GDP. In all this, the availability of capital will be a key factor because the sector will need $600 billion of capital to fund the growth in advances, write-offs of non-performing loans and investments in IT and human capital upgradation. Clearly, there are some challenges ahead. Banks will no longer enjoy windfall treasury gains that the decade long secular decline in interest rates provided and that will expose the weaker banks. Next, competition from foreign banks will intensify, possibly in areas such as wealth management that require new skill sets in sales and marketing, credit and operations. Lastly, as McKinsey points out, younger consumers will demand better service. Indian banks do have an edge in their large branch networks which gives them access to low cost money but it?s how money is lent and fees are made that will separate the men from the boys.