Better times ahead for banking sector

Better times are ahead for the banking sector as a revival in the economic activity coupled with inflation is likely to boost the credit growth in the second half of current financial year, says a study.

"The credit blues are behind... And better times are ahead... The second half of fiscal year 2010, is likely to witness a revival in economic activity and inflation to drive a pick up in credit growth from current levels," the report by brokerage firm IDFC SSKI said.

The sequential expansion in margin is also going to continue in the said period of time as "largely stable lending rates, coupled with traction in credit growth would support margins in the second half of FY10," the report said.

However, the current and saving accounts (CASA) ratio may face some pressure in the fourth quarter of FY10, as deposit growth accelerates and interest rates harden, the report added.

Regarding gross non-performing assets (NPAs), the report said, "Accelerated provisioning in the context of RBI's new floor on total coverage of 70 per cent likely to limit decline in provision costs."

The Reserve Bank in the second quarter monetary review in October left rates unchanged as there was excess liquidity and weak credit demand, but going forward, RBI may tighten the rates in a bid to ward-off inflationary pressures in the second half of FY10.

In the second quarter of this financial year, banks reported a net profit growth of 25 per cent year-on-year ahead of market estimate of 14 per cent.

The CASA ratio of the banks also recovered from low levels in the first quarter of 2010, driven by "sanguine interest rates at a systemic level", besides, lower deposit growth in line with muted credit off-take also helped.

Besides, the contained rise in gross NPAs, given the large restructuring of stressed advances by banks till first quarter of FY'10 and improvement in growth conditions likely to alleviate credit quality concerns in the long term.

So far this year, NIMs have shown an improvement on a quarter on quarter basis. The CASA ratio also increased across banks, aided by benign systemic interest rates, the report said.