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Entry of new banks and liberalisation in presence of foreign banks will increase competition in the sector, even as loan growth is expected to be suppressed due to weak economic growth next year, according to research firm Dun & Bradstreet (D&B).
The new banking licences, for which over two dozen entities are vying, and guidelines which incentivise foreign banks to turn into a wholly owned subsidiary (WOS) of its parent, will result in greater competition in banking, it said.
"Competition in the banking sector to intensify with the entry of new banks...Competition from foreign banks set to intensify," the research house said in a report.
RBI Governor Raghuram Rajan had said that he expected new bank licences by January 2014. However, the foreign lenders are not much enthused about the WOS guidelines and have been asking for clarity on a slew of topics.
For the domestic banks, it is expected to be a double whammy as the credit growth in the system is likely to be suppressed, it added.
"Demand for credit is expected to stay low in 2014 as Indian economy continues to grow at a lower rate," it said.
The GDP grew at 4.8% for the second quarter and the banks' credit growth has been in the 15-17% range for a good part of the fiscal as there is little appetite for credit.
The economic gloom has also resulted in pressure on the asset quality front, with the gross NPAs in the system rising to 3.6% by March 2013, with the state-run banks accounting for a bulk of it.
D&B attributed the rise in NPAs to high exposure of banks to projects in the infrastructure and iron and steel sectors and said asset quality will be a "major concern" going forward.
"The effectiveness of cabinet committee on investment in clearing stalled infrastructure project would play a major factor in determining the asset quality of the banking sector going ahead. A faster clearance rate would help Indian banks contain the pace of growth of distressed loan assets," it said.
