Slowing credit offtake hit banks' profitability in 2012-13: RBI

A continued slowing of credit offtake affect growth and profitability of the Indian banking sector for the second consecutive year in 2012-13, amidst a slowdown in the domestic economy and tepid global recovery.

Credit growth to all productive sectors of the economy slowed down, although retail credit remained buoyant, Reserve Bank of India (RBI) said in its report on Trend and Progress of Banking in India 2012-13.

The lower credit offtake, despite the softening of interest rates, affected profits of scheduled commercial banks (SCBs), with all major indicators of profitability, viz, return on assets (RoA) and return on equity (RoE) showing a decline during the year.

However, new private sector banks and foreign banks managed to improve their returns on assets by reducing operational costs, the report noted.

The ratio of non-performing assets (NPAs) of scheduled commercial banks increased further during 2012-13, RBI said, adding, there was a rise in the slippage ratio as well as the ratio of restructured advances to gross advances.

The increased stress in asset quality during the year was primarily on account of non-priority sectors. There was a rise in the NPA ratios for the industrial and infrastructural sectors, the report noted.

Banks, however, remained well capitalised and the capital adequacy positions of SCBs were above the stipulated norm, both at the aggregate and bank group-levels, RBI said.

With the financial inclusion plan completing three years, there were signs of considerable progress in terms of expanding the outreach of banking through both branch and non-branch means. While banking outlets were provided in almost all identified unbanked villages with a population of more than 2,000, the process of bringing in unbanked villages with a population of less than 2,000 was in progress, RBI said.

Urban co-operative banks (UCBs) registered a stable growth in assets during 2012-13, but there was some moderation in profitability. The asset quality of these institutions witnessed sustained improvement.

While state co-operative banks and district central co-operative banks (DCCBs) showed improvement in profitability and asset quality in 2011-12, primary agricultural credit societies (PACS) incurred more losses than the gains that state co-op banks and district co-op banks made, resulting in short-term losses for the co-operative credit structure.

The long-term rural co-operative credit institutions continued to witness losses and also exhibited weak asset quality in 2011-12.

Non-banking financial institutions
Net profits of non-banking financial companies - deposit taking (NBFCs-D) and systemically important non-deposit taking NBFCs (NBFCs-ND-SI) showed marginal improvement during 2012-13. Profits of standalone primary dealers showed a significant expansion.

Overall asset quality of a large part of the NBFI sector, however, deteriorated during the year, partly reflecting economic slowdown.

In terms of capital adequacy, the entire NBFI sector was comfortably placed, RBI said.

While the RBI has undertaken some key initiatives to expand the banking system, increase competition and strengthen the payments and settlement mechanism and fortify capital, some key issues remain. These include:

  • Effective reduction in NPAs and improvements in the loan recovery process;
  • Achieve sustainable financial inclusion through suitable business and delivery models;
  • Stimulate and foster competition in the banking sector and liberalise licensing policies; and
  • Bring about decisive changes in the present banking structure to enable it to grow in size, resources, efficiency and inclusivity.

Global developments
Globally, banks continued their efforts to repair their balance sheets and improve their capital ratios, albeit at an uneven pace across countries, RBI noted.

The growth in global credit was multi-paced. The return on assets (RoA) improved for banks in the US and some emerging market and developing economies (EMDEs), but declined in European countries.

Financial conditions in the global banking system improved following monetary easing measures by central banks in advanced economies.

The global regulatory reforms initiated in 2009 to strengthen the financial sector and to support sustainable economic growth by reducing future risks progressed in many areas such as Basel III framework, systemically important financial institutions (SIFI) and financial market infrastructures.

RBI said it has undertaken several initiatives in the sphere of regulatory and supervisory policies during the year. These include issuing guidelines for new bank licences, rationalising branch authorisation policy and revision in policy regarding restructuring of advances by banks/financial institutions.

Also, the RBI released the policy framework for setting up of wholly owned subsidiaries by foreign banks in India.

Other issues include rationalisation of bank lending against gold and bank finance for purchase of gold.

Significant headway was made in improving credit delivery channels, credit flow towards productive sectors and financial inclusion by revising priority sector loan limits and refocusing on credit growth to micro and small enterprises. The latest is the launch of the Bharatiya Mahila Bank Ltd, which is aimed at addressing gender related aspects of empowerment.