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Banking Faces Hard Times

Monday, March 04, 2013
By Manik Kumar Malakar

The banking sector is one of the key drivers of the economy and the omens for this vital sector are currently not very good. While the Union Budget per se was not very encouraging, the banking sector has a lot of negatives that they have to overcome.

And even some measures like the permission of banks to act as insurance brokers will benefit other segments, rather than banks.

“A high borrowing programme could keep interest rates elevated – a key negative takeaway for the banking sector,” says analyst M. D. Mahesh of Kotak of the effects of the Union Budget on the Banking Sector in India. Thus, gross borrowing of Rs 6,290 billion implies that interest rates will remain elevated. “We believe that the RBI will look to cut rates by approximately 50 basis points (one basis point is one hundredth of a percentage point) during the rest of CY13,” opines Mahesh.

Revenue growth for the banking sector in India is likely to be testing since the general economic environment is challenging. Pressure points that the industry will have to face would be that loan growth is slowing and pressure on NIM (Net Interest Margins) is rising. NIM is the difference between the revenue that is generated from a bank’s assets and the expenses associated with paying out its liabilities. 

Additionally, investment gains are subdued as interest rates are likely to come off slower than expected and there is an increase in the tax rate mainly through surcharge and clarity on certain benefits.

“Credit costs will be high, which implies earnings growth would be less than 10% over FY 2013-15,” estimates Mahesh.

The government announced a social thrust for the banking sector. The Budget extended the interest subvention scheme on short term crop loans to private sector banks. This was hitherto available only to PSU banks, cooperative banks and RRBs, which will bring such banks on parity and encourage them to lend in these segments. “However it remains to be seen whether they will actually lend, considering the risks of high NPA’s in such loans,” says Dinesh Thakkar Chairman & Managing Director, Angel Broking.

“These loans can be highly delinquent and private banks may not fully use this scheme,” says Mahesh.

Considering the capital constraints being faced by most of the PSU (Public Sector Undertaking) banks and the imminent implementation of stiffer Basel-III norms from April 1 2013, an infusion of Rs 14000 crore into PSU banks, was on expected lines. “This will be positive for PSU banks with low capital adequacy,” says Thakkar.

“Whilst this would help PSU banks comply with Basel-III norms in FY 14, PSU banks will need repeated doses of capital over the next few years to comply with progressively stringent Basel-III norms beyond FY 14,” say Krishnan A.S.V. of Ambit Capital.

There was some clarification upon an important lacunae upon the banking sector. The Union Budget clarified that a securitization trust (SPV or Special Purpose Vehicle) would be liable to pay tax before distributing income to investors, following recent litigations on this issue. Such income will not be taxed at the hands of the holder bank thereby ending the overhang of double-tax liability.

The government also allowed some additional avenues for the banks which may not really prove to be so beneficial for the banking industry after all.

Banks have now been permitted to act as insurance brokers, which would slightly aid the fee income profile of banks. “But the bigger positive would be for the insurance companies, as they will be able to push their products through multiple banks, as against the current practice of a tie-up with one bank only,” says Thakkar.

Then too the real estate push is proving to be a damper. Tax relief on interest for loans such as on first home purchase appears to be driven by an intention to promote affordable housing. “However, given that various other factors such as property prices, overall economic environment and interest rates play a much larger role in influencing the demand for housing and hence housing loans, we do not see the additional tax deduction alone to materially impact demand for home loans in the near-term,” says Krishnan.

Lastly although Indians were renown for their saving habits – this virtue   is now looking distinctly oversold. Nomura had recently said that India’s saving rate is set to plunge to a 10-year low of 27 per cent by end of this fiscal, and the government has done precious little to address this hiatus, a move that would have helped the banking sector. “There was an expectation, that the budget this time, will introduce measures to encourage savings into financial instruments, but the budget disappointed on these fronts,” ends Thakkar of Angel Broking.

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