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Though the Indian banking industry has shown resilience to the global financial meltdown it has not escaped unscathed. The global financial market went through trying conditions during most part of FY09 owing to losses arising out of the US sub-prime mortgage loans.

The markets made a partial recovery during Apr-May 2008 due to corrective actions taken by central banks in their respective countries in a coordinated manner.

At the end of Mar 2008 in India, banking sector assets to GDP ratio rose to 91.8% as compared with 83.5% a year ago; however, the credit growth story was not encouraging, as it decelerated owing to lower growth in personal loans, and agriculture and allied activities. Nevertheless, credit to the services sector showed no signs of decline. Further, the credit to real estate sector slipped slightly but remained higher than that disbursed to most other sectors.

Bank deposits continued to grow, though growth in term deposits was moderate. Investments in government securities also increased significantly; however, as a percentage of both total assets and net demand and time liabilities (NDTL), investment by banks in government securities continued to decline, albeit, marginally.

As on Nov 21, 2008, total credit disbursed by SCB’s to the commercial sector was 27.0% higher on a y-o-y basis as compared with 23.1% a year ago. Likewise, non-food credit of these banks was 26.9% higher (y-o-y) than 23.7% a year ago. The credit deposit ratio (CDR) of SCBs saw incremental growth because their credit growth was higher than their deposits. On a y-o-y basis, SCBs reported a CDR of 93.7% as compared with 65.9% a year ago.

The quality of bank assets had witnessed improvement during the period of upswing in the economy with a consistent growth in standard assets. However, there could be concerns on the quality of assets, which is reflected in the movement of NPA. Between the period FY07 and FY08, the ratio of addition to NPAs as a percentage of gross NPAs went up while the recovery of NPAs calculated as a percentage of gross NPAs have declined. Furthermore, with a decline in the recovery of NPAs, the rise in the total loan assets restructured by banks during the above period raises further questions.

On the total income front, the share of non-interest income in the total income of banks has reportedly declined since 2004. However, fee based income which forms a part of the non interest income of banks have registered a significant rise. Most banks have cashed in on such income as an additional source of revenue during FY08 when the economic boom generated opportunities in treasury operations, M&A deals, investment banking etc. However, on the back of the current global economic meltdown whilst every organisation is undertaking a moderate approach with regards to mergers, treasury operations etc, growth in income from this avenue may dwindle in the coming year.

In the current scenario, the greatest challenge that confronts banks is that of meeting credit demand without impairing credit quality. Given the situation, banks will be required to monitor their credit portfolios very rigorously.