Slackening demand for credit and pressure on asset quality are some of the challenges facing the Indian banking sector in 2013. This could, in turn, cause banks to increase their focus on fee income in order to keep maintain their margins intact, said a report on the banking sector by Dun & Bradstreet (D&B) India.
As per the Reserve Bank of India's second quarter review of monetary policy for FY13, the GDP growth estimates for FY13 is revised downwards from 6.5% forecast earlier to 5.8%. Any further slowdown in the Indian economic growth is likely to impact the demand for bank credit, according to the Indian Banking Sector Outlook for 2013.
The slowdown in the economy increases in the risk of default and restructuring of loans can increase which could further lead to deterioration of asset quality. However, implementation of stringent policies could prevent a sharp deterioration in asset quality. During FY12, gross Non-Performing Assets (NPAs) value recorded a year-on-year growth of 45.3% and net NPAs registered a year-on-year growth of 55.6%. As per the recent data available with Corporate Debt Restructuring cell, as on September 2012, a total of 466 cases have been referred to the cell, with 327 cases amounting to Rs 1,87,390 crore have been approved since the start of CDR mechanism.
Traditionally, banks have derived limited income from fee-based services such as wealth management, credit card services, treasury services, investment banking and advisory services. However, as the economy is showing signs of slowdown and the demand for credit is slowed, banks are struggling to keep their margins intact. Also, with changing times, consumer needs have changed with various avenues of investment available. This is likely to increase banks focus on offering fee-based services as the earnings from such services are more stable than interest bearing products and it also helps in mitigating risk via diversification of products and services, the report said.
In order to support the flow of funds to the productive sectors of the economy and ease the liquidity crunch in the banking system, the RBI has cut the CRR by 175 basis points during the course of the year which stands at 4.25%, as on November 2012.
“Given the easing of international commodity prices, particularly of crude, decline in core inflation as demand conditions moderate, there has been some steady moderation in inflation in the recent period. As a result, the RBI might decide to ease the policy rate during end January 2013," the report said.
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