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LARGE GOVT BORROWINGS MAY LIMIT CREDIT GROWTH AT 17-18%: ICRA REPORT


Large government borrowing, as projected in the annual Budget, may allow for only 17-18 per cent growth in credit, as banks would have to set aside funds for subscribing to government securities, said rating agency ICRA.

The net borrowing of the Central and State governments through bonds is estimated to be about Rs 4.7-lakh crore in 2011-12 (Rs 4.1-lakh crore in 2010-11). As banks fund around 40 per cent of these bonds, they would need to set aside Rs 1.9-lakh crore for the purpose.

If deposits were to grow by 17 per cent, the balance funds would support only 17-18 per cent credit growth, said the ICRA report on the ‘Indian Banking Sector'.

Further, in case the government deficit is higher because of lower tax collection and underprovided fuel and food subsidies, the maximum possible credit growth would be still lower.

Recently, Mr Pratip Chaudhuri, Chairman, State Bank of India, had said that credit growth will come down due to rate hikes by the RBI. SBI is likely to see credit growth of 16-19 per cent, instead of 19-22 per cent range as was projected earlier, he said.

THE CHALLENGES
Challenges to the banking sector include the increase in and deregulation of savings bank deposit rate; a tighter monetary policy; large government deficit; increased stress in some sectors (such as state power utilities, airlines, and microfinance); restructured loan accounts; un-amortised pension/gratuity liabilities; increasing infrastructure loans; and implementation of Basel III.

While most banks may not require significant capital now, few of them may require capital to meet Basel III norms. For instance, nine banks had Tier I capital of less than 8.5 per cent as on March 31, 2011.

“Considering the stricter deductions from Tier I and the fact that some of the existing perpetual debt (around Rs 25,000 crore) would become ineligible for inclusion under Tier I, some banks may need to infuse superior or core capital (equity capital or Tier I),” the report said.

BAD LOANS
Gross NPA percentage could increase to 2.3-2.7 in the current fiscal, from 2.3 last year. A rise in interest rates could also negatively impact asset quality.

However, fresh slippages may not be significantly higher than last year, since the last year's figures had included slippages arising out of restructured accounts, agriculture debt waiver scheme and automation of asset classification, the report said.

PROFITABILITY
According to ICRA, banks could face a fall in profitability of 5-10 basis points due to depreciation on investments because of rising yields. Net interest margins could be lower in the first half of the fiscal due to a temporary slack in credit growth.

However, there could be some relief due to lower credit provisioning requirements. Banks are no longer required to maintain a provision cover ratio (PCR) of 70 per cent on new non-performing assets, following the RBI's guidelines.

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