Poor Disbursals May Hit Bank Income
Poor loan disbursals in 1996-97 (April-March) are likely to hit the revenues of Indian banks, but lower provisions will cushion the impact on their profits, analysts said. Operating profits (profit before provisions) will definitely be hit, said S R Krishnan, banking analyst at Peregrine Securities.
But on the net profit front, banks should be okay, he added.
Analysts said poor credit growth in 1996-97 will affect revenues as the banks made most of their money from lending. Making profits from trading in securities and bonds is all right to some degree, said an analyst. But the real money is in commercial lending.
Banks have been hit by poor credit demand in a year that has seen a rapid growth in deposits.
The latest Reserve Bank of India (RBI) data show that bank credit increased by just Rs 132.73 billion between April 1996 and January 31 1997, while deposits grew by Rs 495.19 billion. Bank credit grew Rs 301.80 billion and deposits rose Rs 247.67 billion during the same period of the previous fiscal year.
Analysts said, slower industrial growth is the main factor behind sluggish credit growth in the current year. The issue is one of bank credit slowing down, said Dick H Mody, banking analyst at ICICI Securities and Finance Company (I-Sec), the Indian affiliate of investment bank J P Morgan. Obviously this is going to affect banks, he said. Banks will also be hit by a fall in interest rates in the current financial year. Prime lending rates range between 14.5 per cent per annum for leading state-run banks to 18.5 per cent for some foreign and small private banks.
They were between 16.5 per cent and 19.5 per cent last March.
When interest rates fall, the reduced interest takes effect immediately for all advances by the bank, existing ones as well as fresh loans. But in the case of deposits, only fresh deposits attract the lower interest rates and existing deposits are locked into the older, higher rates. This fall in interest rates will squeeze bank spreads, Mody said. (Reuter)