The banking sector is struggling to grow with the increase in non-performing assets (NPA) quarter after quarter. Stress in the economy, particularly in sectors like aviation, metals, real estate, textiles and even agriculture and export based industries have been responsible for growth in NPAs which have led to higher provisioning expenses for the banks, denting their profitability.
Higher interest rates have compounded the effect making it difficult for the bank’s borrowers to repay on time. The increases in NPAs have been relatively much higher for the public sector banks. Private sector banks, however, have been able to restrict the rise in their NPAs on back of relatively prudent lending. The banks have also had to resort to large restructuring in the last one year either by lowering the interest rates or increasing the loan tenures for private borrowers. State electricity boards have piled up huge losses in recent years and have been the major contributor to the restructuring books of banks, said Varun Varma, Analyst, Angel Broking.
Ever since the inflation levels stated rising, the repercussions have been felt in the banking sector. RBI has increased the interest rates 13 times in the last two years to curb inflation. The bankers also increased their lending rates by 300-400 basis points over this period which made it extremely difficult for companies to service their debt leading to increase in defaulters. However, recent repo rate cut by 50 basis points have led to most banks decreasing their base rates by 25 basis points. This move is expected to lower the lending rates further on , if they are in a position to lower their deposit rates also. The banks are not in immediate position to reduce their deposit rates, fearing a fall in the deposits, which they are already struggling to attract. If the banks decrease their interest rates on loans without reducing their deposit rates, they will have to sacrifice their margins, Varma said.
Banks are also facing a challenge in attracting deposits that are going to tax benefit saving schemes. If a tax payer puts his deposit at an interest rate of 10 per cent, after paying tax he would only get 7-9 per cent interest depending on his marginal tax rate, where as the effective interest rate would be higher in other saving schemes which provide tax benefits.
Talking about the future of the sector, he said, decrease in inflation is expected to be the main driver of growth of the banking sector. The monsoons have to be at the right time and adequate, otherwise there will be further rise in inflation due to increase in food prices. Inflation can further increase if diesel prices get deregulated. However, the comforting factor has been the dip in inflation levels over the past 3-4 months particularly the manufacturing inflation.
Lower inflation in the periods to come should help increase the savings rate including the deposit growth rates, and lower the savings-investment gap which is being currently plugged by the high current account deficit. Also, as interest rates trend down, lower interest servicing cost for the bank’s borrowers should aid in improving the asset quality for the banking sector, Varma concluded.