Transcript Title

‘CURRENT TRENDS AND THE UNFOLDING OF
BANKING SCENARIO’
A Krishna Kumar
Managing Director & Group Executive (National Banking)
State Bank of India
INDIAN MERCHANTS’ CHAMBER
MUMBAI
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Structure of the Presentation
Section 1: Present State of Banking
Trends in Deposits and Credit
Sectoral Performance: June 2012
Performance of Banks in Q1 FY13
Section 2: Unfolding of Banking Scenario
Basel III and Capital Requirement
NPA and Restructured Standard Assets
Falling NIM – Pressure on Banks’ Profitability
Financial Inclusion – An Engine of Inclusive Growth
Section 3: Way forward for Banks
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Trends in Deposits and Credit
 Slowing GDP growth coupled with higher interest rates have implications for
credit and deposit growth.
Deposits and Credit Growth
FY 11
FY12
Apr-Aug’11
Apr-Aug’12
Deposits
17.7
13.7
18.5
14.3
Advances
22.6
16.3
20.3
16.6
C-D Ratio
74.5
76.7
73.7
75.2
GDP (%)
8.5
6.5
 On 10th August, 2012, the C:D Ratio 75.2% as against the benchmark of 60%.
 Growth rate of deposits in 2011-12 was the lowest in the last 10 years.
 In 2011-12, SCBs balance sheet grew at 14.5% compared to 18.8% growth in
2010-11
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Sectoral Deployment of Credit: June 2012
 Non-food bank credit grew by 18.6%
in June 2012 against 19.6% (yoy) in
June 2011, mainly due to slowdown
in the economy, industrial production,
and falling investments.
 Agricultural credit increased by 16.8%
in June’12 against 12.8% in June’11.
 Credit to industry grew by 20.3%
(yoy) in June’12 against 22.0% in
June’11.
 Credit to services sector increased by
19.1% (yoy) in June’12, lower than
20.9% in June’11.
 During Apr-June 2012, credit growth
in most of the sectors is in line with
industrial growth rate. The actual
impact of credit flow on sectors would
reflect in subsequent quarters.
Credit To Manufacturing Sector (April-June)
Sectors
Share in
Incremental
2011
2012
2011
2012
Industrial
Growth Rate
2011 2012
Growth in Credit
Petroleum, Coal
14.2
25.1
11.5
14.7
6.0
1.6
Mining & Quarrying
8.6
11.6
17.6
14.6
0.6
-1.1
Rubber, Plastic &Products
1.6
8.6
3.5
13.7
-2.5
8.9
Wood & Products
0.8
1.7
7.1
10.8
-8.1
-1.3
Leather & Products
0.4
1.8
2.7
9.9
5.4
6.6
Paper & Products
0.8
4.9
1.7
7.9
6.7
0.0
Basic Metal & Product
10.8
18.3
2.4
2.9
15.6
2.5
Food Processing
3.3
3.0
1.8
1.2
17.4
-0.5
Infrastructure
55.9
16.3
5.0
1.1
5.2
3.6
Chemicals & Products
-4.8
-3.1
-2.4
-1.1
3.5
-1.9
Cement & Products
4.8
-1.2
7.9
-1.4
0.1
9.9
Textiles
3.0
-5.7
1.0
-1.5
-2.3
7.8
Industries
100.0
100.0
2.9
2.1
7.7
-0.7
Source: RBI and CSO, All in percentage
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Performance of Banks in India in Q1 FY13
Parameter
All Banks
Level (Rs Cr)* YoY
Nationalised Banks
Level (Rs Cr)*
YoY
Old Pvt Banks
Level (Rs Cr)*
YoY
Growth (%)
Deposits
133609
16.6
181683
15.5
Credit
103776
19.5
137661
18.2
Business
237385
17.8
319344
16.7
Interest Income
3713
24.5
4784
21..9
Interest Expenses
2611
27.8
3452
25.4
NII
1113
17.3
1332
13.6
Other Income
397
15.9
395
11
Operating Expenses
658
16.3
739
13
Operating Profit
Net Profit
Change (%)
RoA
1
0.01
0.8
0
NIM
2.9
-0.1
2.8
-0.1
Cost to Income
47.6
0.9
44
0.1
C-D Ratio
76.9
2
75.5
1.9
Gross NPA
2.4
0.3
2.7
0.6
Note: *Level refers averages in a particular banks group in June 2012, YoY refers
Source: Business Line, 20 Aug 2012
31615
22883
54498
936
665
271
87
168
18.5
21.1
19.6
32.8
37.8
22
17.6
21.8
New Pvt. Banks
Level (Rs Cr)*
YoY
127386
110969
238355
4628
2982
1646
803
1055
1
0
1.4
3
-0.1
3.3
53.8
4
50
72.9
1.7
85.8
2.1
0.1
1.9
to % change in June'12 over June'11
20.3
23.8
4.9
31
33.3
27
23.2
22.2
0
0.1
-0.8
2.6
-0.3
 A survey by Business Line (Table); Banking business has grown at a much slower pace
in Q1FY13. (Sample All banks 37, Nationalized Banks 20, New Pvt Banks 4 and Old Pvt
Banks 7).
 Slower pace restricts the capacity of banks to raise interest rates. So, both NIM and
NII are likely to be affected.
 As NPAs go up, banks are required to make higher provisioning, which in turn affect their
bottom-line.
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Section 2: Unfolding of Banking Scenario
A. Basel III and Capital Requirement
B. NPA and Restructured Assets
C. Falling NIM – Pressure on Banks’ Profitability
D. Financial Inclusion – An Engine of Inclusive Growth
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A. Basel III and Capital Requirement
Transition to Basel III
Capital Requirement
 The implementation of Basel III capital
requirements is proposed to be operational  In order implement Basel III, banks
need capital around:
from 01 Jan’13 and norms will be fully
Capital
implemented by 31 Mar’18.
Banks
Capital Type
Requirement
 In our view, the migration to Basel-III norms
will not pose any problem for banks in India,
as most of the banks are well capitalized
(CRAR 14.1% and Core CRAR 10.3% in
Mar’12). But, to maintain 11.5% CRAR as per
Basel-III may be a challenge for banks.
 The new rules will thus impose a burden on
Government which will need to infuse
additional capital into public sector banks.
Alternatively, it may consider diluting its equity
stake in selected public sector banks.
 It is expected that CRAR may fall to 12.5% in
the year 2012-13 due to growing NPAs and
slowdown in business.
PSBs
Pvt. Banks
Common Equity
Rs 1.4-1.5 tn
Non-Equity
Rs 2.65-2.75 tn
Common Equity
Rs 200-250 bn
Non-Equity
Rs 500-600 bn
Source: Annual Report 2011-12, RBI
Transitional Arrangements - SCBs (% of RWAs)
Minimum Capital
01 Jan'13 31 Mar'14 31 Mar'15 31 Mar'16 31 Mar'17 31 Mar'18
Ratios
Minimum Common
4.5
5.0
5.5
5.5
5.5
5.5
Equity Tier 1 (CET1)
Capital Conservation
0.625
1.25
1.875
2.5
Buffer (CCB)
Min CET1+ CCB
4.5
5.0
6.125
6.75
7.375
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Min Tier 1 capital
6.0
6.5
7.0
7.0
7.0
7.0
Min Total Capital
9.0
9.0
9.0
9.0
9.0
9.0
Min Total Capital +CCB
9.0
9.0
9.625
10.25
10.875
11.5
Source: RBI
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B. NPA and Restructured Assets
Asset Quality Deteriorating
 Asset quality concerns persist as the growth in NPAs accelerated and continued to
outpace credit growth in FY12. Gross NPAs grew at 43.9%, far outpacing the credit growth
of 16.3% in 2011-12. The divergence in growth rate of credit and NPAs could put further
pressure on asset quality in the near term. The quantum of debt restructured went up
from 2.7% in Mar’11 to 4.9% in Mar’12.
 In 2011-12, the increase in gross NPAs was largely contributed by some key sectors viz.,
priority sector (4.4%), retail (2.8%) and real estate (1.7%). The shares of these sectors
(priority, retail and real estate) in the banking system credit is 30.6%, 18.5% and 16.7%
respectively and in the banking system NPA is 47.8%, 18.3% and 9.7% respectively.
 Gross NPAs of
scheduled
commercial banks
likely to increase
to 3.7%-4.1% in
FY13 (RBI Annual
Report).
Asset Quality & Restructured Assets (end-March, in %)
Foreign New Pvt. Old Pvt.
PSBs
All Banks
Banks
Banks
Banks
Bank Group
FY11 FY12 FY11 FY12 FY11 FY12 FY11 FY12 FY11 FY12
0.6
2.4
0.9
2.9
1.3
3.5
2.0
2.7
Gross NPAs
2.3
3.2
2.5
2.7
2.6
2.2
2.0
1.8
Net NPAs
Restructured Standard
Assets to Total
Standard Advances
1.0
1.5
0.7
0.6
0.6
0.4
0.5
4.3
5.9
0.2
0.1
0.7
1.1
3.0
Source: RBI Annual Report 2011-12
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C. Falling NIM – Pressure on Banks’ Profitability
 NIM of the SCBs declined to 3.07% in
FY12 from 3.14% in FY11.
 The fall in the NIM is possibly due to
high cost of deposits in view of
tightness in liquidity and inability to pass
on the increased cost of funds to
borrowers given subdued credit growth.
 RBI has raised concerns about the
higher NIM, as it increases the cost of
financial intermediation.
Financial Indicators of SCBs (%)
Ratios
Return on Total Assets
2011 2012
1.1
1.1
Return on Equity
13.7 13.6
Efficiency (Cost/Income Ratio)
46.2 45.3
NIM
3.14 3.07
Liquid Asset to total assets
29.8 28.9
Source: RBI
 A study by BCG reported that NIM is
expected to be hit about 2.0% by 2020.
NIM is less than 2% in countries like
South Korea, Canada, Singapore,
Malaysia, Germany, Australia, Spain,
France and UK.
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D. Financial Inclusion - An Engine of Inclusive Growth
Measures taken by RBI and Banks
Financial Inclusion
 Out of the 600,000 habitations in the
country, only about 30,000 had a
commercial bank branch.
 NSSO data revealed that nearly 51% of
farmer households in the country did not
seek credit from either institutional or noninstitutional sources of any kind.
Financial Indicators in India
Acess to Finance
2009-10
2010-11
Population per Branch
14,000
13,466
Population per ATM
19,700
16,243
%age of people having Deposit A/C
55.8
61.2
%age of people having Credit A/C
9.3
9.9
%age of people having Credit Cards
1.53
1.49
%age of people having Debit Cards
15.2
18.8
Insurance coverage
5.2
5.1
Source: Trends & Progress of Banking, 2010-11
 Banks have covered 74,199 (99.7%) of
these unbanked villages with population
above 2000 by March 2012. Now the
challenge is to cover all the unbanked
villages in the country.
 As on Mar’12, 105.5 mn no-frills accounts
have been opened by banks with
outstanding balance of Rs.93.3 bn. Now,
RBI has mandated banks to provide ‘Basic
Saving Deposit Account’
to all their
customers, which covers free minimum
balance and free ATM card.
 Banks have also introduced a General
Purpose Credit Card (GCC) facility up to
Rs. 25,000/- at their rural and semi-urban
braches. As on Mar’12, banks had
outstanding credit of Rs 27.3 bn in 1.3 mn
GCC accounts.
 As on Mar’12, the total number of KCCs
issued was as 20.3 mn with total amount
outstanding of Rs 1651.5 bn.
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Section 3: Way Forward for Banks
 Push Business Growth to Trend Level: Banks need to support a growing
economy. Credit should grow at the level of 18-19% to achieve 8-9% GDP
growth.
 Monitor Asset Quality: NPA is the most crucial problem among banks. To
contain NPAs below 2% is still a challenge for the banks, as business
environment is challenging.
 Capital Requirement: Indian Banks need around Rs 5 lakh crore of capital
for migration to Basel III regime. This cannot be achieved without
Government capita infusion.
 Financial Inclusion: A country of 6 lakh unbanked villages is major
stumbling block to ensure financialisation of the economy.
 Consolidation: Bank M&A is required to increase the size of banks and
improve India’s position among the Top Banks in the world, which in turn will
help the corporates to raise capital from domestic markets.
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Way Forward for Banks
 Competition: RBI is planning to issue new bank licenses and has issued
guidelines allowing subsidiary route to foreign banks, which will intensify
competition both from within and outside.
 Technology Development: Explosive growth in the usage of new channels
(like internet banking, mobile banking) is going to characterize the next
decade of Indian banking.
 The HR challenge: Due to a legacy of several decades, the PSBs will
witness unprecedented loss of skills and competencies in form of retiring
senior and middle management executives over the next few years.
 Infrastructure financing: During the 12th Five Year Plan (2012-17),
infrastructure funding requirement has been estimated at $1 trillion. Banks
have to play a major role in this area.
 Introducing innovative financial products (like CDS) is an efficient way to
manage risks involved in the banking business.
 Need to review laws governing the Indian banking sector
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