Umadevi Naidu Banking sector is at the cusp of change as Indian economy is about to enter another cycle of growth after

going through a prolonged downturn. In the last few years due to economic slowdown there has been low credit offtake, increased provisions for non-performing assets and low net interest margins. Besides this, high interest rates exerted pressure on the capital expenditure cycle of the corporate India in FY11-12. Also many projects stalled due to lack of clearances from various ministries. These factors have resulted into cost overruns and made some projects appear commercially unviable. But with the recent reforms rolled out by the government, it seems that all is not gloomy in the coming quarters. Things are expected to take a change for the better from here. In recent months, the government has shown willingness to embrace reform agenda and has left behind the state of policy paralysis. Many decisions such as allowing foreign direct investments in retail, aviation, and broadcasting are some such steps that are expected to propel capital expenditures hereon. This has also created a positive sentiment in the economy. Fall in commodity prices including crude oil is expected to result into lower inflation. Subsidy rationalisation in various areas should help contain fiscal deficit, thereby presenting more scope for the Reserve Bank of India to cut the policy rates in this financial year. Experts are of the opinion that the repo rate, the rate at which the RBI lends to commercial banks, may see gradual reduction of 75 to 100 basis points in this financial year. The financial markets are already taking cognisance of this and have been reacting positively. Short term interest rates are already down from their recent peak seen in March 2013. The rates on 3-month and 1-year certificate of deposit are already down by almost 100 basis points indicating lower funding costs for the banks. Some banks have already reduced interest rates on select fixed deposits to bring down their cost of raising funds. There is a conscious effort by banks to position themselves best to optimally benefit as and when the economic cycle turns. A fall in interest rates in the current financial year is expected to benefit banks in two ways. First, it will increase the demand for loans and second it will plug the increase in non-performing assets of the banks. Banks have been aggressively following up with the willful defaulters which would lead to better recoveries of loans. Public sector banks are expected to benefit from the restructuring of the state power distribution companies. This will bring down the provisions and improve profitability of the banks.

While the economic recovery is expected to take care of the lower than average credit offtake growth, the key concern for the banks is the moderate growth in the deposits in the financial year 2012-2013. The budget provision to do away the tax arbitrage available to debt mutual funds has ensured that the bank fixed deposits make a strong comeback. A point to note here is debt mutual funds have been one of the most preferred investment vehicles for the investors in the last five years. As money is expected to move from mutual funds to traditional bank deposits, banks too are making focused efforts to mobilise retail fixed deposits. On the one hand banks are doing their best by managing their assets and liabilities and on the other hand there is a constant endeavour to offer better products and services to the customers. Be it deregulation of interest on saving bank account or doing away of prepayment fees on home loans, banks have taken all the regulatory moves in their stride and offered superior products to the customers. Today there are banks offering 6% to 7% rate of interest on the balance in the saving bank accounts as compared to 4% offered traditionally. Banks are also coming out with attractive offers for home loan transfers. In the competitive home loan market, customers are benefitting by getting lower interest rates. This would make banks balance sheet more efficient. For better product delivery banks are also investing in customer service domain. Investment in technology is high on agenda for most banks and mobile banking is the preferred platform along with internet banking. Though, traditional branch banking continues to effectively engage customers, technology is also used to empower the customers at the bottom of the pyramid. Banks are coming out with innovative products such as prepaid cards and secured cards to include more customers who otherwise are denied such products. Amidst such dedicated efforts, financial inclusion is no more just a buzz word for the Indian banking industry. It has become a theme Indian banking industry is putting into practice. The Reserve Bank of India is expected to soon come out with more banking licenses which will further increase competition in the banking sector. It will be one big step in the direction of financial inclusion. This along with successful implementation of AADHAR card will ensure that more Indians enjoy world-class banking and in the process banking industry would have sound business. This would result in a win-win situation. ENDS

Graphics below are sourced from Deutsch Bank report date 2april2013. The report attached for your perusal.