The macro picture in India has remained worrisome for quite some time.

The lag and cumulative effect of past monetary tightening, on the one hand, and policy stasis, on the other, has affected growth prospects.

The first quarter GDP growth which was at a nine-year low of 5.3 per cent will not see a major improvement in the second quarter.

Further, between June 18, 2012, when the RBI announced its first mid-quarter review, and September 17, 2012, when it released the second mid-quarter review policy, the RBI adopted a status quoist approach both on the liquidity and rate fronts.

The RBI reduced cash reserve ratio (CRR) by 25 basis points on September 17, and another bout of CRR reduction was carried out on October 30.

Thus, for the better part of the second quarter, the policy parameters remained adverse for the banking system. Let’s see how the prolonged growth weakness amidst a tighter money regime has affected the performance of banks in the second quarter (Q2) of 2012-13.

We consider 37 banks, consisting of twenty nationalised banks (NBs), seven new private banks (NPBs), nine old private banks (OPBs) and SBI. These banks account for more than 95 per cent of the business of the banking system.

Profitability

The banking sector as a group has witnessed a successive decline in RoA (return on assets) in the two quarters following March 2012. The deterioration in RoA is also observed on an annual basis.

While the RoA for public sector banks (PSBs) have declined, the private sector banks have managed to improve their RoA.

The NPBs had the highest RoA followed by OPBs, SBI and NBs. RoA is primarily guided by the asset quality, pricing power, cost efficiency and ability to generate fee-based income.

We consider each of these dimensions for the different bank groups.

Pricing Power

Pricing power captured through the NIMs (net interest margins) has deteriorated for the industry in the quarter ended September 2012. In fact, the NIMs for the industry have declined successively in the June and September quarters compared to the March quarter.

However, as a group, private banks, both old and new, have marginally improved their NIMs, whereas the same for PSBs has declined in quarter ended September compared to June. The NPBs not only enjoy much higher NIM, they have been able to improve upon it.

Asset Quality

SBI, the market leader in terms of business, has the highest level of NPAs (non-performing assets) both in absolute and percentage terms in the banking industry since quarter ended March.

In the quarter ended September 2011, nationalised banks had lower GNPA (gross NPA) percentages compared to the NPBs.

However, in the past one year, the GNPA percentages have increased for NBs and declined for the NPBs.

NPBs as a group have the least NPA percentages amongst all bank groups in the quarter ended September.

If we compare the position in the subsequent two periods vis-à-vis the March 2012 quarter, we find in the June quarter all bank groups reported higher GNPA percentages. However, in the September quarter, GNPA percentages increased for all bank groups except NPBs.

While gross NPA percentages have increased by 46 basis points for NBs, net NPA percentages have also increased by 34 basis point in the September quarter over the June quarter.

An increase of similar order in gross and net NPA percentages is also observed for OPBs. Thus, both NBs and OPBs suffer from under-provisioning.

Had there been adequate provisioning, the RoA of these two bank groups would have turned out to be much lower.

Efficiency

Operating efficiency captured through the cost-to-income ratio has also deteriorated in the September quarter for all the banks taken together compared to an improvement to the tune of 436 basis points in the June quarter.

Private banks have reported an improvement and the public sector banks a worsening of their cost-to-income ratios in the September quarter over the June quarter.

There has been significant improvement in this ratio for old private sector banks in the June quarter. However, the cost-to-income ratio remain at higher levels for the private banks compared to their public sector peers.

Business Growth

Business growth was highest for the NPBs followed by SBI, OPBs and NBs in the Sep quarter over the June quarter. The business growth was sharper in the deposit segment compared to advances for all the bank groups in the September quarter.

While NPBs had a relatively sturdy growth in both deposits and advances, the PSBs had a subdued growth in advances compared to deposits in the September quarter on a sequential basis.

Higher business growth coupled with a retail leaning of the loan portfolio has helped the NPBs to protect their NIMs.

Overall, while the PSBs are struggling with asset quality issues and their consequent implications, the NPBs have been able to weather the economic slowdown and tighter monetary policy regime better.

(The author is Associate Dean, Xavier Institute of Management, Bhubaneswar. Views are personal.)

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