The banking sector is likely to witness moderate growth in 2012-13 coupled with downside risks to net interest margins (NIMs) because of difficult economic environment, a Barclays research report said here on Friday.
“Growth is likely to be moderate, as investment activity remains sluggish and an inflation fighting RBI restrains monetary growth. On the revenue front, we expect fee growth to remain moderate and we see some downside risks to NIMs,” the report said.
It warned 2012-13 will be a difficult year for the banking sector. “We maintain our view that FY13 will be another tough year for the banking sector. The macro environment is likely to remain difficult, particularly in contrast to the sharp recovery of FY10,” it said.
Overall credit and deposit growth will remain sluggish, with deposits at 16 per cent and credit at 17 per cent.
It will be on account of low investment activity as well as tight interest rates, the report said, adding RBI will continue to fight inflation which is heading north.
The report said slowdown in project sanctions activity in FY12 is expected to impact the overall system growth over the next year.
Referring to credit quality, the report said things are not likely to witness any sharp improvement in the current financial year. “Credit quality has deteriorated sharply and the levels of restructuring and slippages have spiked in FY12. We do not expect a sharp improvement in credit quality trends in FY13,” it said.
The industrial sector, which constitutes around 45 per cent of total credit, continues to witness sluggish growth prospects, it added. “While growth is slow, leverage among a concentrated set of large borrowers remains high. In our view, the combination of weak industrial growth and high levels of leverage will continue to put pressure on credit quality — a view that is consistent with that of the rating agencies,” the report said.
It also said that asset quality is likely to come under stress in the second half of current financial year. “There is already a large pipeline of loans that are awaiting restructuring, and credit quality issues in private generation should start impacting banks in the second half of FY13 as newly commissioned plants face fuel shortages. Hence, while bank managements are expecting strong recoveries from non-performing assets (NPAs) created in FY12, we expect fresh problem in asset generation to remain high,” it said.
About growth in fee-based income, the report said it would remain moderate in this financial year. “We expect fee income growth to remain below asset growth as in FY12, as loan approvals remain slow,” it said, adding that this will have adverse impact on net interest margins.