Banks need to reduce cost, pass benefit to customers, says RBI

Indian banks will have to reduce costs by increasing their efficiency and pass on the benefits to lenders and depositors, the Reserve Bank of India (RBI) on Thursday said in the Trends and Progress report for 2011-12.

“The challenge before banks is to make the best use of technology and innovation to bring down intermediation costs while protecting their bottom lines. The challenge for Indian banks is to reduce costs and pass on the benefits to both depositors and lenders,” RBI said.

The banking regulator has noted that the bad assets in the banking sector has increased significantly during the year 2011-12 – which are mainly contributed by public sector banks – due to inadequate credit appraisal during the boom period of 2003-07 coupled with the adverse economic situation.

“Stressed financial condition of some state electricity boards and airline companies further added to the deterioration in the asset quality of banks,” RBI said. While non-performing assets (NPAs) have increased, the provisioning coverage ratio (PCR) for the banking sector has declined, mainly due to public sector banks. PCR for public sector banks declined to 47.6 per cent from 49 per cent a year ago, while for private sector banks, it increased to 75 per cent from 74 per cent.

During 2011-12, the gross NPAs of public sector banks increased at a higher rate compared to the growth rate of NPAs at a system level. According to RBI data, net NPA to net advances for public sector banks increased to 1.7 per cent in 2011-12 from 1.2 per cent in the previous year while for private sector the ratio increased marginally to 0.6 per cent.

The banking regulator further noted the slippage ratio for public sector banks was higher than their private sector counterparts, although the recovery of bad loans were also higher by government-run lenders.

Public sector banks were also at the forefront so far as the restructured assets are concerned.

“The steep increase in gross NPAs during 2011-12 was accompanied by a considerable pick-up in the growth of restructured advances. This was mainly due to the steep increase in restructured advances by public sector banks, particularly nationalised banks,” RBI said.

Besides, the deterioration in asset quality was also evident in the form of rising sub-standard and doubtful assets as a percentage of gross advances. “Increase in these two categories of NPAs as percentage of gross advances indicated that NPAs became stickier,” RBI said.

According to the central bank, nearly half of the non-performing assets came from the priority sector advances while farm loan NPAs have also shown an increase.