Wednesday, January 28, 2009

Observations on Indian Banks



Businessline draws attention to the non-performing assets (loans not serviced - either the principal or interest or both - within 90 days of due date) of eight of the largest Indian banks, five public and three private sector. A couple of preliminary observations

1. The NPAs when seen in their true perspective is reasonable, even healthy. Over the last year, even as lending increased by Rs 2.6 lakh Cr, gross NPAs rose by just Rs 7,218 Cr, a clear sign of the relative calm in the Indian banking sector. Even this too can be, atleast partially, attributed to the interest rate hikes in response to inflationary pressures, and the recent rate cuts are likely to act in the opposite direction. In the circumstances, the credit squeeze (or more specifically, the reluctance of banks to lower their lending rates despite the steep rate cuts by RBI) in India is more likely a case of psychological contagion effect of the widespread couter-party risk induced collpase of the credit markets in the US. Or is it a case of banks being stretched out in servicing their costly liabilities run up during the rate increases early this year? Or more likely both.

2. If we take the second quarter of 2008 (ie. March 2008) as a reasonable approximation of the beginning of the credit squeeze, then all the three private sector banks appear to have slipped up in relative terms whereas the public sector banks appear to have held up well. The relative increase in NPAs of private sector banks is also much larger given the relatively smaller increase in their credit growth when compared to public sector banks (public sector banks saw an increase of 28.6% in credit flow in 2008 as against 19.8% in 2007, whereas the figures for the private banks were 11.8% and 24.2%). If this is true, then can we say that private banks in India would have gone the same way as their US counterparts, but for the "heavy hand" of RBI regulation under YV Reddy?

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