BANKING SECTOR: A SNAPSHOT OF TRENDS AND PROGRESS

BANKING PERFORMANCE: Gross non-performing assets (NPAs) as a ratio to gross advances for commercial banks increased from 2.25% in FY09 to 2.39% in FY10 Profitability declines as return on assets (RoA) was lower at 1.05% in FY10 than 1.13% during the previous year Cost as well as return on funds declined in 2009-10 . In particular, the decline in return on advances was most striking from 10.50% in 2008-09 to 9.29% in 2009-10 . The decline in return on advances in 2009-10 was more prominent for foreign and new private sector banks The spread — the difference between return and cost of funds — fell marginally by about 0.10 percentage points in 2009-10.

At the bank group level, the fall in the spread was again most striking for foreign banks Net profit of the banking sector rose 8.3% to 57,109 crore. While operating profit rose 10% to 1,22,000 crore Share of foreign banks in total assets fell from 8.5% in 2009 to 7.2% in 2010. While the share of public sector banks went up from 71.9% to 73.7% in 2010. Old private banks marginally improved their share to 4.5% from 4.4% in the previous year, while the share of new private banks fell slightly from 15.2% to 14.6% The percentage of CASA, or current and savings account deposits, increased from 33.2% to 35.4% between 2008-09 and 2009-10 . Savings deposits alone contributed for about 34% to the total increment in deposits in 2009-10.

LOCAL CONCERNS

Credit recovery will respond slowly as banks were still engaged in repairing their balance sheets As non-bank finance is only a partial substitute of bank finance, households and SMEs, which are largely reliant on bank lending, may face credit constraint Overall credit conditions expected to weaken as the central banks initiate progressive withdrawal of liquidity support provided by them Continuation of these tighter conditions could begin to have impact on the availability of credit to private firms.

GLOBAL CONCERNS 

Failures of smaller banks continued in 2010 at about the same pace as 2009, driven largely by credit losses on commercial real estate lending The European banking system needs more capital even if there were no increase in the regulatory capital requirements under the enhanced Basel II regime.

POLICY STANCE

Going forward, liquidity management will become critical for banks, as the monetary policy stance is responsible to macro-economic developments. The liquidity in the system has transmitted from a surplus mode to a more balanced mode, and in the process, the repo rate has emerged as the policy rate.

SOURCE: http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/Banking-Sector-A-snapshot-of-trends-and-progress/articleshow/6892196.cms