Asset quality pressures, strict regulatory norms set to hit banks' profitability: Survey

The profitability of banks in India may decline sharply as their financial health takes a hit due to rising asset quality pressures and the effect of stricter regulatory requirements, according to a Confederation of Indian Industry (CII) survey.

"Banks expect deterioration in performance on key parameters including credit growth, net interest income and growth in net profit and return on equity for 2012-13. Further, banks are expected to face increased pressure on their financial health owing to stricter regulatory requirements, going ahead," CII said in a statement.

The survey by CII assessed the prevailing market conditions against the asset quality, capitalisation and growth estimates. It also dealt with the impact of the current regulatory environment on bank business and profitability.

A total of 15 banks - five public sector, three private and seven foreign banks, participated in the survey.

On the impact of regulatory requirements, the survey pointed out that Basel-III capital requirements are likely to have the highest impact on profitability, followed by the revised guidelines on priority sector lending .

Further, higher provisioning norms for restructured assets are also expected to have a major impact on banks' profitability.

Since the global financial crisis, the regulatory environment for the banking sector has changed significantly across the world.

"Even as growth, inclusion and stability have been the key focus areas in the Indian context, the current regulatory and policy environment is critical to ensure that banks remain financially sound and profitable," said Chandrajit Banerjee, director general, CII.

Besides stricter regulatory requirements, the surveyed banks foresee deteriorating asset quality as one of the most critical challenges impairing profitability of the Indian banking sector.

The gross NPA level of the Indian banking sector, which was already at its highest level in the last six years (as at March end, 2012) is expected to worsen with a significant rise in restructured loan accounts, it added.