Pick up in banks' credit offtake and declining dependence on expensive deposits are likely to help them to improve their margins this fiscal but rising bad loans continues to be a concern, rating agency CARE today said.
"Credit off take is expected to show positive impact on net interest margins (NIM) going forward. The impact of high-cost deposits should wear off in the current quarter, post which NIMs should show further improvements," Care rating agency's Managing Director and CEO, D R Dogra said.
NIMs of most banks have already started showing an improvement on a quarter-to-quarter basis, having been under pressure since September 2008, the agency said.
However, rising bad loans in the industry is likely to pose challenges to banks moving ahead and they need to beef up their risk assessment mechanisms to maintain a healthy balance sheet to avoid further defaults, Dogra said.
"The key challenges before the banks will be to strike a fine balance between credit growth and asset quality at the same time sustaining the profitability in the hawkish interest rate scenario," Dogra said.
According to the agency, non-performing assets in the industry is likely to rise to 3.5 per cent of the total assets in 2010-11 as compared to 2.8 per cent in the previous fiscal.
Banks saw a sharp pick up in their loan disbursals in the recent months in line with the recovery in the economy from the ill-effects of the global financial crisis, which hit the world in late 2008.
On the back of a strong demand in the market, banks disbursed a total of Rs 1,15,548 core to meet the 16 per cent credit growth target set by the Reserve Bank for 2009-10.
During the fiscal year 2009-10, banks total credit disbursement stood at Rs 4,64,849 core, registering a year-on-year growth of 16.7 per cent as against a growth of 17.5 per cent in the previous fiscal.
CARE also estimates the loan growth in the industry to be in the range of 20-22 per cent in the industry in FY11, especially with increase in demand from the infrastructure sector, while the growth in deposits is likely to be around 18-20 per cent.
On a cautious note, CARE said that the increase in credit growth will not necessarily help significantly boost profitability as board treasury gains could be limited in the medium term, given the hardening interest rate scenario.
Also, the increase in NPA provisioning and rise in slippages in the restructured assets could also impact banks' profits, the agency said.