It’s being billed as the year of significant challenge for the Indian banking sector. And, it comes just after a year which has seen even the weakest among nationalised banks post handsome gains. Official figures show a 64 per cent rise in the operating profits for 19 nationalised banks in 2001-02, while net profits more than doubled. And all this in a terrible year for the economy in general. As everyone agrees by now, most of the growth in profits was fuelled by a phenomenal rise in the banks’ treasury profits, thanks to a sharp drop in yields.
Cut to 2002-03. The first quarter is over, and the signs are not too bright. The kind of treasury profits made in the last fiscal are highly unlikely to be repeated given that interest rates are already perilously low. Alongside, credit offtake is at a trickle. And much of it is thanks to refinancing activities by corporates where old expensive loans are being replaced with cheaper borrowings. So, which revenue streams will provide healthy revenues even as conventional streams dry up? A question which different banks are seeking to address in different ways.
The chairman of State Bank of India, Janki Ballabh, is of the view that in Q1, credit offtake has not fallen to the extent it normally does every first quarter. There has been some offtake by the manufacturing sector, and if the trend continues, the overall offtake picture in the first half of the fiscal may be healthier than expected, he feels. But universal banks like Mr Ballabh’s have retail loans to fall back on. This, the SBI chairman feels, lends itself to a good balancing act for banks. With corporate spreads falling to ridiculous levels, the retail lending portfolio needs to be given a big push to achieve a respectable bottomline by the year-end. In fact, there can even be some aggressive pricing play on retail banking products, attributable both to competition and liquidity. But that’s an option which only universal banks or banks which have already got their retail act in place, have.
On the wholesale banking side, banks would have to focus on derivatives, structured financing and even privatisation mandates to stay afloat this year. But this is where foreign banks are particularly strong. So the challenge is greater for state-run banks in these areas. Mr Ballabh says that with the cost of deposits coming down, he also sees some downward adjustment on the lending rates side during the year. A view echoed by Housing Development Finance Corporation boss Deepak Parekh last week. This correction may, in fact, allow some limited trading profits once again for banks. But even so, bankers like Mr Ballabh reckon they would only be to the tune of 20 per cent or so of what was made last year. The days of a 100-200 per cent net profit growth, seen last year for some, are clearly over. A 20-25 per cent profits growth should be more than enough if things are managed prudently. A drought may change some of these projections, but ironically may be good news for treasury operations.
A foreign bank country head I spoke to is unambiguous that this fiscal will clearly see a downward pressure on banks’ earnings. The Reserve Bank-advised cushion by way of an Investment Fluctuation Reserve for banks should help absorb some of the negative impact of a decline in treasury profits. But even as the corporate profit and loss accounts, at least for the old economy, look healthier this time thanks also to lower interest rates, the P&L accounts for banks will still come under pressure. The irony is, 2001-02, which was a terrible year for industry, turned out to be an excellent one for banks. But this fiscal, the story’s going to be very different. The bigger picture from this is that the excessive dependence of banks on interest incomes needs to go. They will have to widen their skill sets so that a bad year for one revenue stream can be easily compensated by good pickings from another. This year will test banks’ preparedness on that front.