India’s Top 500 Companies 2008
  
   
 

The banking sector is regarded as the nerve centre of the economy and its performance emulates the growth of the economy. As on March 31, 2009, there were 82 scheduled commercial banks operating in India, of which 38 banks (comprising 22 public and 16 private sector banks) featured in the Top 500 Companies of 2009. Being one of the prominent sectors, banking forms around 10% of the total market capitalisation and around 14% of the total income of the Top 500 Companies.

The last fiscal year will go down in history as an extreme crisis year for the financial sector; however, the Indian banks have been comparatively less-affected by the crisis that so widely affected banks in countries around the world. The limited exposure of the Indian banks to troubled assets, a relatively lower presence of foreign banks, and most importantly, the prudential and pre-emptive policies of the RBI have shielded the Indian banking system. However, the scenario has left the Indian banks more risk averse in their lending. Furthermore, the risk management and monetary policy has achieved a new dimension post this crisis.

Overall the year gone by favoured the public sector banks, with higher growth in terms of both credit and deposits. The following were the key trends that emerged in the FY09:

Public sector banks dominate business growth

The total business (advances plus deposits) for the top 38 banks grew by 24.4% in FY09 y-o-y slightly higher as compared with growth in FY08, which stood at 23.7%. The sector growth was driven by the public sector banks, which grew by 27.6% as compared with 23.8% in FY08, while the private sector business registered a 13.2% growth much lower as compared with 23.5% in FY08.

Public banks drive credit off take

The total advances for the top 38 banks grew by 24.0% in FY09 y-o-y marginally lower as compared with 24.7% in FY08. On account of the apprehension of private banks towards lending due to the global financial crisis, coupled with the lower growth in their deposits, the total advances for the private sector banks witnessed a moderate growth of 14.3% much lower as compared with 25% growth in FY08 y-o-y. On the other hand, the advances by public sector banks grew by 26.9% as compared with 24.6% in FY08.

Working capital loans (which comprised 42.6% of the total advances) dominated the advances growth, growing by 27.1% in FY09. Public sector banks, which traditionally have been more akin to lending for working capital requirements, witnessed a higher growth of 29.2% in advances towards working capital as compared with a 16% growth in working capital advances of private sector banks. The total term loans, on the other hand, saw a lower growth of 21.8% in FY09 y-o-y as compared with 25.2% in FY08, due to a slowdown in economic activity and deferment in the capital expenditure by India Inc.

Private sector sees their priority sector lending grow

The aggregate proportion of priority sector advances to total advances for the top 22 public sector banks stood at 30% slightly lower than 32.3% in FY08. However, the proportion in case of private sector banks improved to 30.5% from 28.9% in FY08. While the total priority sector lending in case of public sector banks grew by 18.0% [y-o-y] as compared with 19.5% in FY08, the private banks witnessed 20.9% increase in priority sector lending in FY09 as compared with 15.1% in FY08, which highlighted a shift in their business proposition from class banking to mass banking.

Lesser exposure to capital market bring down sensitive sector lending Although the total lending of the top 38 banks to the sensitive sectors grew by 14.5% in FY09 (y-o-y), the share of sensitive sector lending to total advances dropped in FY09 from 20.6% to 19.0%. Both the private as well as the public sector bank’s sensitive sector lending share dropped from 30.6% in FY08 to 28.7% in FY09 and from 17.6% in FY08 to 16.4% in FY09, respectively.

Consequently, the exposure to capital markets also shrank. The total lending to capital markets (which forms around 9 -10% of the total sensitive sector lending) dropped by 0.2% in FY09 as against a growth of 58.7% growth witnessed in FY08. The drop was even more significant in the case of private sector banks, which cut their lending to capital markets by around 13.6% in FY09 as against an 80% growth in FY08.

NPAs of private sector banks rise, while that of public sector banks decline

In FY09 the banks turned more cautious about disbursements, therefore their total advances grew at a comparatively slower rate over last year. In lines with slower growth in the advances, the gross NPA to gross advances ratio for all top 38 banks at an aggregate level slipped from 2.3% in FY08 to 2.2% in FY09. While the public sector banks saw their Gross NPA ratio drop from 2.3% in FY08 to 2.1%, the Gross NPA of private sector banks rose from 2.4% in FY08 to 2.9% in FY09 due to a faster growth in their incremental gross NPA, which rose by 37% as compared with a 15% increase in their advances.

Term deposits dominate, public sector takes larger share of deposit pie

Given the higher risk aversion coupled with falling equity and real estate prices, the deposits of the top 38 banks grew by 24.6% in FY09 as compared with 23.0% in FY08 due to a 28.1% growth in the total public sector banks deposits. The public sector deposits grew by 23.1% in FY08.

The growth in deposits was driven by term deposits (forming 67.1% of the total deposits), which grew by 29.6% as compared with 24.5% in FY08, while the total demand deposits registered a meagre 8.8% growth. The growth for demand deposits stood at 24.6% in FY08. Savings bank deposits too grew at a slower pace of 19.2%.

Public sector regains dominance in banking

The total assets, which signify the size of the banks, for the top 38 banks grew by 22.6% in FY09. The growth was driven by the growth in total assets of public sector banks by 26% as compared with private sector banks at a slower pace of 12.2% in FY09. In FY08 the total assets for private sector banks grew by 26.5%.

Increased investments in safer options; lower valuation of existing non-SLR investments play spoilsport

Investments for the top 38 banks grew by 24.2% y-o-y as compared with 22.8% in FY08. The deployment of funds in SLR investment for the top 38 banks stood at 80.4% as compared with 78.1% in FY08, up by 27.9% on account of an increase in government borrowings during the year. Correspondingly, as the risk aversion intensified, the investments in riskier assets also declined. The share of investments in shares, debentures and bonds stood at 7.9% as compared with 10.0% in FY08. The total investments in these assets dropped by 2.1% in FY09 as against a rise of 15.5% in the previous year. SLR ratio too shows a similar picture, as the share of SLR investments to total deposits for the top 38 banks rose from 27% to 27.7% on account of preference for liquid assets.

FY09 saw banks function at higher levels of operating efficiency

The total operating expenses of the top 38 banks increased by 17.6% in FY09 (y-o-y). The public sector banks saw a 19.8% growth in expenses as compared with private sector banks at 12.7%. The operating expenses ratio that calculates the total operating expenses to the average funds deployed of the top 38 banks, however, slipped from 2.0% in FY08 to 1.9% in FY09. Also, the cost to income ratio (operating expenses / (NII + non-interest income) fell from 48.6% to 45.6% in FY09 as the operating expenses increased at a slower rate as compared with both the net interest income and other income.

Sector sees its profitability maintained with an upward bias

The net interest margin (NIM) of the top 38 banks saw a slight improvement from 2.56% in FY08 to 2.61% in FY09 due to increase in net interest income (NII) by 26.2% in FY09 (as against a 11.2% increase in FY08). While the top public sector banks saw their NIM maintained at 2.48%, the private sector NIM improved from 2.79% to 3.05% in FY09. The NIM of the top private sector banks improved primarily on account of the higher deposit rates offered by public sector banks and their lower CASA deposits as compared with the private sector banks.

Private sector banks continue to expand, financial inclusion remains priority

As on March 31, 2009, the branch network of the top 38 banks was 58,740 branches and 40,531 ATMs. Out of this network, rural branches formed 31%, followed by semi-urban, urban and metropolitan branches, which formed approximately 25%, 23% and 21% of total branch network, respectively.

The total branch network grew by 15%, (branches growing by 8% and ATMs by 29%). The growth was higher in the case of private sector banks, which grew by 28% (branches grew by 19% and ATMs grew by 33%), while the public sector banks witnessed their network grow by 12% (branches grew by 6% and ATMs grew by 27%). Out of the total new branches, 47% were located in rural, semi-urban areas (higher in the case of public sector banks at 51%). The higher representation in rural areas underlined the focus of banks on financial inclusion and micro finance. Banks also adopted no frills account and user-friendly technology to tap the population that is spread out in a diversified country like India.

The total number of ATMs set up increased by 25.5% with state bank group recorded strong growth of 34.5%. The banks overseas branches saw a growth of 7 % (from 129 to 138), with most the preferred locations continuing to be UK, Hong-Kong and Singapore. BoB has highest number of overseas offices followed by SBI and BoI.

Adoption of Basel II norms proved instrumental in maintaining the competency

Capital adequacy norm play a crucial role in determining the financial stability and operating efficiency of the banking system. The top 38 banks have achieved an average CAR of 13% (Basel I) and 13.8% (Basel II) as against 12.8% and 12.3% in FY08 respectively, depicting reluctance in lending by the Indian banks following the economic slowdown and failure of large banks in developed countries. The Basel I CAR for the top 38 banks increased by 19 basis points, with 17 basis points in the case of public sector and 30 basis points increase for private sector banks.

Restructuring grows to curtail NPA growth and provide a lifeline to the MSMEs: A win-win solution

FY09 saw restructuring by the banks grow by a whopping 297.2% (y-o-y) from Rs 171 bn in FY08 to Rs 679.2 bn; however, this was an RBI-supported move. In order to ensure ample liquidity in the system, the RBI had given preference to restructuring of loans rather than relaxation in NPA norms especially to micro, small and medium enterprises (MSMEs). Also, the RBI relaxed the asset classification norms for the banks to restructure loans to viable units facing cash flow problems such that the accounts that were standard as on September 1, 2008 would carry the same status if restructuring proposal is taken up by January 31, 2009, and is implemented within 120 days (as against the 90 days timeframe stipulated earlier), thus allowing more time to implement the restructuring. Further, banks were also allowed deep restructuring, that is, give fresh loan to pay interest on old loans (or what is more commonly termed as funded interest term loan (FTIL) and convert working capital outstanding into term loan in cases of diminishing receivable and dipping inventory valuation. However, the banks were required to make full provisions in case of FTIL loans.

In the above context, as would be intuitive, the growth in restructuring was primarily driven by the public sector banks, which saw a 356.2% growth, while the restructuring by private sector saw a growth of 64.2%. Also, restructuring was mainly in the non-CDR category, which constituted around 97% of the total loans restructured.

Restricted growth in borrowings

With overall restrain in the primary and secondary capital markets, coupled with lower credit off-take as compared to increase in deposits, the borrowings of the top 38 banks saw a meagre growth of 5.9% as against a total liabilities growth of 22.6% in FY09. The growth was further lower for the public sector banks whose total borrowings grew by 4.1% as compared with the private sector banks 8.9% growth. While the incremental borrowings for the public sector banks came from the RBI (constituting around 60% of the total incremental borrowings), the private sector borrowings came from private sources and other financial institutions. Also, the RBI took some proactive steps to improve the foreign exchange liquidity such as raising interest rate ceilings on non-resident Indian (NRI) deposits, offering forex swap facility to banks, giving banks the flexibility to borrow in overseas markets, liberalising premature buyback of foreign currency convertible bonds (FCCBs) and relaxing ceiling interest rates on short-term trade credit and external commercial borrowings (ECBs). The ECBs of the top 38 banks grew by 10.9% in FY08, and its share in the total borrowing went up from 56.8% in FY08 to 59.4% in FY09.

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