EXPECTED BUDGET IMPACT: Positive
LONG TERM OUTLOOK: Positive
(77.4% as on January 25, 2013 vs. 75% during previous quarter). We believe, FD rates offered by banks are likely to be sticky as the gap between credit growth and deposit mobilization has widened during recent times. With the pressure on yields on assets likely to rise due to intense competition in retail segments without commensurate fall in the cost of funds, NIM compression for the banking system is possible.
Banks are currently borrowing Rs.935 bn from the RBI under LAF window ( 1.3% of NDTL), higher than the RBI's comfort levels of +/- 1%. Earlier in the month of January 2013, RBI had cut the CRR by 25bps to 4.0% and we expect one more CRR cut of 25bps during March 13, which could infuse another Rs.180 bn into the system. The CRR cut is definitely beneficial for banks from margin perspective as they could lend additional amount to borrowers which was not earning any interest earlier.
On asset quality front, Indian banks are likely to witness rising stress on their loan book especially in the sectors like Infrastructure, Aviation, Textiles, Agriculture, Construction, SMEs etc. Infrastructure especially power sector is under stress mainly due to delay in project implementation and shortage of fuel-linkages. For many PSU banks, stressed portfolio has gone up to 10% of their loan book which could be the potential risk, going forward. Even agri portfolio is witnessing stress on asset quality due to moral hazards as farmers are delaying the payments on expectation of another debt waiver scheme of 2008 kinds.
Last but not the least, consolidation in the industry has so far only been restricted to roundtables (except few deals). Now is the time to act on this, as duplication of IT infrastructure, manpower and capital is becoming prohibitively costly.