A Crisil study has revealed that banks? core profitability for the current financial year is expected to decline.
The rating agency has, provisionally, put the net profitability margin of banks at 1.4% from an estimated level of 1.6% in 2006-07.
This is due to rising borrowing costs and recent regulatory measures impacting interest spreads and marginal improvement in the operating expense and fee based income levels, Crisil explained.
The study feels that though the inherent asset quality of the banking system has significantly improved, strong credit growth may bring its own risks, which could impact asset quality. ?In the face of rising expansions and acquisitions in the Indian corporate sector and the current high-interest rate scenario, banks? corporate portfolios may face some stress?, it said.
Crisil conducted the study for Federation of Indian Chambers of Commerce and Industry (FICCI) for the three-day FICCI-IBA conference on ?Global Banking : Paradigm Shift : Managing Transition? to be held in Mumbai on September 12-14, 2007. Other findings of the study are the possible impact of strong credit growth and associated risks on asset quality, and a continuation of the war for resources into the medium term.
Further, considering the increasing competition in the retail asset segment and most banks? being on a quest for higher yields in retail loan segment, Crisil believes that the gross NPAs and weak assets of the banking system will increase marginally.
The key factors that will enable improved asset quality would be adequate internal controls, strong risk assessment ability and an efficient collection process.