Banks profitability likely to dip in FY08: Study

The Reserve Bank's tight monetary policy is likely to bring down the profitability of banks by 20 basis points during the current financial year.

There could be a decline in the net profitability margin (a ratio of net profitability and net revenue) of banks to 1.4% in 2007-08 compared to 1.6% last year, according to a study conducted by Crisil for FICCI.

The monetary measures taken by RBI, such as increase in repo rates by 1.75% in the last couple of years and hike in cash reserve ratio (CRR) by 2%, have increased the overall cost of resources for banks, the study said.

The cost of deposits witnessed a sharp increase of around 60 basis points in 2006-07, it said, adding that the decline in SLR by around 3% is no longer sufficient to fund the credit growth.

The study observed that given the situation, banks scramble to mobilise deposits to fund the high level of credit growth and the cost of resources is bound to move northward in 2007-08.

It pointed out that during 2000-01 to 2004-05, banks reported increase in profitability margins, backed by steady interest spreads, reducing operating expenses and stable but low fee-based incomes. The net profitability margin (NPM) of the banking system touched the peak level in a decade of 1.83% in 2004-05.