Overall economic growth has dipped from 8.5 per cent in 2010-11 to 6.5 per cent in 2011-12.
The slowdown has impacted the business growth of the banking system.
Excluding window dressing by banks, deposits and advances grew 13.4 per cent and 17 per cent in 2011-12 respectively compared to 15.9 per cent and 21.5 per cent in 2010-11. In such a scenario how have the nationalised banks (NBs) and new private banks (NPBs) fared?
Compared to a 15 per cent growth for NBs, deposits of NPBs grew 16.3 per cent. On the lending side, growth for NBs was 18.1 per cent compared to 20.1 per cent for NPBs in 2010-11.
NIMs: Not only the deposits and loan growth for NPBs was higher than that for NBs, they also reported better interest margins. NIMs for NBs declined 21 bps to 2.95 per cent compared to an much smaller decline by 8 bps for NPBs to 3.53 per cent in 2011-12.
NPA: The asset quality of public and private sector banks brings out a stark contrast. While the gross NPA percentages of NBs have increased from 1.9 per cent in 2010-11 to 2.5 per cent in 2011-12 that for NPBs have declined from 2.2 per cent to 1.8 per cent. In absolute term, the gross NPAs of NPBs remained at the same levels in 2011-12 as they were in 2010-11. However, for NBs there was 56 per cent increase between 2010-11 and 2011-12.
RoA: The interplay of NIMs and NPA was reflected in the profitability of these two categories of banks.
It is the 58 bps higher NIMs and 68 bps lower GNPA percentages that have resulted in 66 bps higher RoA for NPBs compared to NBs.
Cost to Income Ratio: The cost to income ratio continued to be favourable for NBs compared to NPBs in 2011-12.
While the cost to income ratio for NBs improved from 46 per cent in 2010-11 to 44.3 per cent in 2011-12 that for NPBs deteriorated from 49 per cent to 50.2 per cent. The higher cost to income ratio of NPBs can be appreciated from the fact that their operating expenses grew 41 per cent in 2011-12 compared to 36 per cent for NBs.
Generally in an environment where economic activity is slowing, an aggressive business growth exposes the banks to problems of adverse selection leading to higher incidence of NPAs. However, we find the NPBs despite being aggressive in business growth, could actually lower their NPA percentages compared to the NBs. Thus, what explains the better asset quality of NPBs vis-a- vis NBs at the end of 2011-12 compared to 2010-11?
The issue can be better addressed by considering the lending philosophy, composition of the loan portfolio and its management for the NBs and the NPBs. If we consider a life cycle of a borrower it goes through ups and downs. When the going is good and the borrower wants to expand business, the typical approach in a NB is to finance the additional borrowing completely itself and reluctance to rope in another lender even if the borrower may be interested in approaching one or more additional banks.
Risk diversification
In contrast, the private sector banks prefer to involve another borrower when the quantum of financing increases a particular threshold so that there is risk diversification and better vigil on the loan.
Matters are complicated further for the NBs as they are subject to pressures from different quarters to give preference to a particular sector or category of borrowers.
In terms of the composition of the loan portfolio, a noteworthy feature of private banks is their relatively larger share of retail loan in their credit portfolio unlike the nationalised banks where the concentration is on the large corporate loans. The large share of retail loans provides a natural diversification to the loan portfolio.
In other words, risk management practices are more robust in NPBs than in NBs. All banks were mandated to migrate to the system recognition of NPAs in 2011-12. The new private banks might be managing the asset book in such a manner that the cleaning is being done on a regular basis where as the public sector banks were faced with cumulative effect of past backlogs in cleaning the asset book in 2012 when they were forced to do so by the regulator.
Economic environment was quite challenging in 2011-12. Negative forces in the economy seem to be bottoming out as investments which witnessed negative growth in Q3 of 2011-12, have grown by 3.6 per cent in Q4.
The Reserve Bank has begun the rate easing process in April. Now there is much pressure on the government to set the macro picture right. In this backdrop, unless there is a disruptive unwinding of the Euro Zone, bottom-line of banks should be improving in 2012-13.
( The author is the Associate Dean, Xavier Institute of Management, Bhubaneswar. Views are personal.)