Better times ahead for banking sector

Better times are ahead for the banking sector as a revival in economic activity coupled with inflation is likely to boost 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 FY10 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 was also going to continue 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 might face some pressure in the fourth quarter of FY10 as deposit growth accelerated 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 is likely to limit decline in provision costs," the report said.

The Reserve Bank in the second quarter monetary review in October left rates unchanged as there was excess liquidity and weak credit demand, but the central bank might tighten the rates in a bid to ward off inflationary pressures in the second half. In the second quarter, banks reported a net profit growth of 25 per cent year-on-year ahead of market estimates of 14 per cent.

The CASA ratio of banks also recovered from low levels in the first quarter, 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 non-performing assets (NPAs), given the large restructuring of stressed advances by banks till the first quarter, and improvement in growth conditions are likely to alleviate credit quality concerns in the long term.

So far this year, net interest margins (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.