The banking sector is likely to witness moderate growth in the current fiscal coupled with downside risks to net interest margins (NIMs) following the difficult economic environment, a Barclays research report said here today.
"Growth is likely to be moderate, as investment activity remains sluggish and an inflation fighting RBI restrains monetary growth. On the revenue front, we expect fee growth to remain moderate and we see some downside risks to NIMs," the report said.
The report warned that the current financial year will be a difficult year for the banking sector.
"We maintain our view that FY13 will be another tough year for the banking sector. The macro environment is likely to remain difficult, particularly in contrast to the sharp recovery of FY10," it said.
Referring to overall credit and deposit growth, the report said it would remain sluggish, as system growth is likely to remain moderate, with deposits at 16 percent and credit at 17 percent, following low investment activity as well as a tight interest rate, as the RBI will continue to fight inflation which is heading north.
Giving the rationale behind such sluggish growth, the report said slowdown in project sanctions activity in FY12 is expected to impact the overall system growth over the next year.
Referring to credit quality, the report said things are not likely to witness any sharp improvement in the current financial year.
"Credit quality has deteriorated sharply and the levels of restructuring and slippages have spiked in FY12. We do not expect a sharp improvement in credit quality trends in FY13," it said.
Elaborating the reasons, the report said the industrial sector, which constitutes around 45 percent of total credit, continues to witness sluggish growth prospects.
"While growth is slow, leverage among a concentrated set of large borrowers remains high. In our view, the combination of weak industrial growth and high levels of leverage will continue to put pressure on credit quality -- a view that is consistent with that of the rating agencies," it said.
The report also said that asset quality is likely to come under stress in the second half of current financial year.
"There is already a large pipeline of loans that are awaiting restructuring, and credit quality issues in private generation should start impacting banks in the second half of FY13 as newly commissioned plants face fuel shortages.
Hence, while bank managements are expecting strong recoveries from non-performing assets (NPAs) created in FY12, we expect fresh problem in asset generation to remain high," it said.
About growth in fee-based income, the report said it would remain moderate in this financial year.
"We expect fee income growth to remain below asset growth as in FY12, as loan approvals remain slow," it said, adding this will have adverse impact on net interest margins.
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