CII Survey on Health of Indian Banking sector in current regulatory environment
-------------------------------------------------------------------------------------------------------------------
CII Survey on Health of Indian Banking sector in current
regulatory environment
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CII Survey on Health of Indian Banking sector in current regulatory environment
-------------------------------------------------------------------------------------------------------------------
Survey on Health of Indian Banking sector in
current regulatory environment
Disclaimer: The findings of the survey represent the views of respondents and do not reflect the views
of CII. On the clause of confidentiality, identity of the respondents can not be disclosed. CII has made
every effort to ensure the accuracy of information presented in this document. However, CII makes no
warranties as to the accuracy or completeness of the information in this report and accepts no liability
for use of the information given in this report.
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CII Survey on Health of Indian Banking sector in current regulatory environment
------------------------------------------------------------------------------------------------------------------TABLE OF CONTENTS
1. About the Survey …………………………………………………………………..
4
2. Executive Summary.........................................................................................
5
3. Market Conditions:
o
Analysis on Key Performance Indicators ……………………………
6
o
Asset Quality & Capitalisation of Banks …………………………….
8
o
Growth Outlook ……………………………………………………………
10
4. Regulatory & Policy Environment:
o
Effectiveness of monetary policy instruments ………………………
11
o
Changes in key policy rates & transmission effect …………………
12
o
Impact of key regulatory requirements on bank profitability ……..
13
5. Conclusion …………………………………………………………………………….
15
6. Annexure Tables ……………………………………………………………………..
16
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CII Survey on Health of Indian Banking sector in current regulatory environment
------------------------------------------------------------------------------------------------------------------ABOUT THE SURVEY
The banking sector holds the central position in supporting the robust growth of Indian
economy. Growing in excess of twice the pace of GDP growth, the total assets size of Indian
banking industry increased more than five fold, from USD 250 billion in 2000 to more than USD
1.3 trillion in 2010. More importantly, the business of banks to GDP ratio almost doubled – from
68 per cent to 135 per cent during the last decade.
Even as the banking sector offers a tremendous growth potential in the long run, in the current
scenario Indian banks are faced with significant challenges like deteriorating asset quality, large
Government deficit, restructured loan accounts, expanding infrastructure loans, pressure on net
interest margins, implementation of Basel III, etc.
Even as growth, inclusion and stability have been the key focus areas, the current regulatory
and policy environment is critical to ensure the banks remain financially sound and profitable.
With an objective of taking stock of performance of banks and their outlook, CII conducted a
survey of leading banks on “Health of Indian Banking sector in current regulatory environment“.
The survey questionnaire was divided in two parts. The first part attempts to assess the
prevailing market conditions vis-à-vis asset quality, capitalisation of banks & estimate the growth
outlook in the short and long term. Part two focuses upon regulatory & policy environment and
aims to understand the views of banks on the current regulatory and policy environment vis-àvis its impact on bank business and profitability.
The feedback received from 15 participant banks was aggregated and analyzed. Among the
respondents, Top Management Executives of 5 Public Sector Banks (PSBs), 3 Private Sector
Banks and 7 Foreign Banks participated in the Survey. The results obtained are presented in
the following pages.
The findings of the survey represent the views of respondents and do not reflect the views of
CII.
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CII Survey on Health of Indian Banking sector in current regulatory environment
------------------------------------------------------------------------------------------------------------------EXECUTIVE SUMMARY
Key Performance Indicators:

Majority of the surveyed banks have seen deterioration in key performance indicators in the
current fiscal (FY 2012-13) including Credit Growth, Growth in Deposits, Growth in Net Interest
Income, Growth in Profit After Tax (PAT) and Return on Equity. However, their performance is
expected to improve considerably during the next fiscal (FY 2013-14) – Ref. Annexure Table 1.
Asset Quality:

80 per cent of the respondent banks foresee a rise in their NPAs while 88 per cent of surveyed
banks have projected an increase in their restructured loan accounts in the current fiscal.
Capital Adequacy:

In case of Public Sector Banks (PSBs), a strong pitch has been made by 80 per cent of the
respondent banks for the need for capital infusion by the Government. CAR of respondent PSBs
expected to average between 12.8 per cent as on January 1, 2013 and 8.5 per cent as on January
1, 2015.

The respondent Private sector banks are found to be maintaining an average CAR of 12 -16 per
cent during the same period.

For foreign banks, the Survey responses indicate that most of smaller foreign banks are already
well capitalized to meet the Basel III targets whereas big foreign banks are expected to raise their
capital level through capital support from their head office.
Growth Outlook:

Majority of the survey respondents (68 per cent) believe that the leading credit rating agencies
would consider to revisit the credit rating of Indian banks from negative to stable by the end first
quarter of next fiscal (Q1 FY 2013-14).

78 per cent of the surveyed banks foresee the Indian banking sector to be the third largest globally
(in terms of assets), by 2025.
Effectiveness of monetary policy instruments:

Majority of the respondent banks see repo rate as the most effective policy tool in the current
macroeconomic scenario.
Changes in key policy rate:



64 per cent of the respondent banks believe that the RBI would cut the repo rate by another 25
basis points by end of the current fiscal while 36 per cent expected no change in repo rate.

82 per cent of the surveyed bankers expected a reduction of another 25 basis points in the Cash
Reserve Ratio by end March 2013 to counter the liquidity deficit in the system.
Impact of key regulatory requirements on bank profitability:

The Basel III Capital requirement for banks is likely to have the highest impact on profitability of
the Indian banking sector.

Among the other key regulatory requirements, the revised guidelines on Priority Sector Lending
and higher provisioning norms for restructured assets would also have a major impact on bank’s
profitability as highlighted by the respondent banks.
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CII Survey on Health of Indian Banking sector in current regulatory environment
------------------------------------------------------------------------------------------------------------------ANALYSIS ON KEY PERFORMANCE INDICATORS
 Key Performance Indicators1

Credit Growth: The high credit growth witnessed during the past years is likely to abate
during the current fiscal, in line with the RBI’s indicative target of credit growth (non-food)
projected at 17 per cent2. The respondent banks foresee an average increase of 17 per
cent in their credit portfolio during 2012-13 which is expected to rise to 18 per cent in FY
2013-14.

Growth in Deposits: The growth in deposits is likely to remain subdued in spite of high
interest rates offered after the deregulation of savings rate. Surveyed banks view an
estimated average growth of 14 per cent and 17 per cent for FY 2012-13 and FY 2013-14
respectively.

Growth in Net Interest Income: The respondent banks have projected a growth of 17
per cent and 19 per cent in their Net Interest Income for FY 2012-13 and FY 2013-14
respectively. The hardening of interest rates during the last two years could be attributed
to a healthy growth in net interest income for banks.

Growth in PAT: Profitability of banks is likely to be impacted substantially this fiscal with
situation expected to improve notably in the next financial year. From an average growth
of 23 per cent witnessed during the last year (FY 2011-12), the surveyed banks have
projected an increase of 14 per cent in profit after tax (PAT) for FY 2012-13. However, it
is interesting to note that this has been forecasted to rise to 21 per cent in FY 2013-14,
reflecting increased optimism of banks for a change in scenario positively.

Return on Equity: Return on equity is estimated to remain stagnant in the current fiscal
at 16 per cent due to decline in profitability. For the next financial year, the situation is
expected to improve marginally with estimated growth in return on equity estimated at 17
per cent in FY 2013-14.
Projection on Key Performance Indicators
25
Per cent
20
FY 2012-13
FY 2013-14
15
10
5
0
Credit growth
Growth in
Deposits
Growth in Net
Interest Income
Growth in PAT
Return on Equity
Source: CII Survey on Health of Indian Banking sector in current regulatory environment
1
2
Refer Annexure Table 1 - Projections on Key Performance Indicators
RBI’s annual monetary policy statement for 2012-13
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CII Survey on Health of Indian Banking sector in current regulatory environment
------------------------------------------------------------------------------------------------------------------ Projections on growth in Credit Off-take (Segment-wise)3

Corporate Loan: Persistently high interest rates have taken its toll on the demand of
bank funds by Indian Inc. As revealed by the CII Survey on Sources of Finance
(December 2012), corporate sector, over the recent years, has increasingly relied upon
internal accruals for their financing needs whereas large corporate entities have also
taken recourse to External Commercial Borrowings (ECBs) to take advantage of lower
interest rate overseas.
Corporate loan segment has been estimated to grow 17 per cent in the current fiscal
whereas it is expected to expand 19 per cent in FY 2013-14, as bankers expect the
policy environment to ease going ahead.

Retail Loan: Retail loans segment has been estimated to grow at 24 per cent in the
current fiscal, registering the highest growth amongst all market segments. For the next
financial year, this segment has been projected to grow at an average 23 per cent. Retail
loan segment is seen to be increasing its share in overall loan portfolio of banks on back
of rising income levels; as indicated by growth in per capita income in the Indian
economy.

SME Loan: Small & Medium Enterprises have been resilient during the economic
slowdown. Despite expectations of a healthy increase in number of restructured
accounts within this segment, bankers project a 20 per cent increase in credit off-take for
the current as well as next fiscal.

Agriculture Loan: Agriculture loans have been estimated to grow at 23 per cent this
fiscal, buoyed by near normal monsoon. For the next financial year, surveyed banks
foresee a growth of 21 per cent in the agriculture loan category, which is likely to get
impacted by the change in priority sector classification by the RBI.
Projection on Segment-wise growth in Credit Off-take
25
Per cent
20
FY 2012-13
FY 2013-14
15
10
5
0
Corporate loan
Retail loan
SME loan
Agriculture loan
Source: CII Survey on Health of Indian Banking sector in current regulatory environment
3
Refer Annexure Table 2 - Projections on Segment-wise growth in Credit Off-take
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CII Survey on Health of Indian Banking sector in current regulatory environment
------------------------------------------------------------------------------------------------------------------ Projections on growth in Sectoral Credit Outstanding4
In terms of sectoral credit outstanding, the Survey has revealed that Agriculture sector is likely
to register a growth rate of 20 per cent in FY 2012-13 and FY 2013-14. However, achieving this
kind of growth is likely to be challenged by the revised priority sector guidelines. In case of
manufacturing sector, the outstanding credit is likely to grow at 17 per cent due protracted
decline in growth of industrial activity (as indicated by the Index of Industrial Production).
However, this has been projected to improve to 19 per cent in next fiscal (FY 2013-14).
The growth in credit outstanding for infrastructure loans is likely to be 19 per cent in FY 2012-13
which is expected to go up to 21 per cent next fiscal as the banking sector supplement the huge
funding requirement of infrastructure sector, estimated at around USD 1 trillion for the 12th Five
Year Plan.
Services sector which account for more than 55 per cent of Indian GDP is expected to see the
maximum growth in credit outstanding, projected at 22 per cent during FY 2012-13 and FY
2013-14. While it has become increasingly evident that the services sector would play the most
important role to put the Indian economy back on a higher growth trajectory, banking sector is
found to be optimistic in supplementing this transition by meeting the financing needs of the
sector.
Projection on Growth in Credit Outstanding
25
Per cent
20
FY 2012-13
FY 2013-14
15
10
5
0
Agriculture
Manufacturing
Infrastructure
Services
Source: CII Survey on Health of Indian Banking sector in current regulatory environment
ASSET QUALITY & CAPITALISATION OF BANKS
 Asset Quality: Growth & Concentration of NPAs, Provisioning Costs and Restructured
Loans
Most of the respondent Banks have witnessed a sharp deterioration in asset quality in the
current fiscal, as reported by an increase in their NPAs and restructured loan accounts.
The credit downgrade of big Indian banks is seen as a warning signal of stress on asset quality
facing the Indian banking sector. According to the Reserve Bank of India (RBI), the gross NPAs
4
Refer Annexure Table 2 - Projections on Growth in Credit Outstanding
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CII Survey on Health of Indian Banking sector in current regulatory environment
------------------------------------------------------------------------------------------------------------------of the Indian banking system (as a percentage of gross advances) at 3.1 per cent during FY12
(end March 2012) were the highest in the last six years, rising from 2.5 per cent in FY07.
Further, rapid pace of loan restructuring is another major issue, as persistently high inflation and
interest rates impact demand and reduce the pricing power of corporates. During the first half of
FY 2012-13, the corporate debt restructuring (CDR) cell of RBI has recorded a nearly 50 per
cent rise in proposals received for restructuring aggregate debt, from Rs 1.64 lakh crore to Rs
2.46 lakh crore on a year-on-year basis. As per the survey findings, 88 per cent of the
respondent banks anticipate a rise in their restructured loan accounts.
In line with the rapid surge in NPAs, banking sector has seen an upward trend with rise in
provisioning costs over the past few years. 80 per cent of the respondent banks have projected
an increase in NPAs while 76 per cent expect an increase in provisioning costs.
In terms of sectoral concentration of NPAs, majority of the respondent banks have the highest
concentration in Industry followed by Agriculture and Services sector. Interestingly,
infrastructure sector was found be the least concentrated sector amongst the respondent banks.
Highest Concentration of NPAs
100
90
80
70
60
50
40
30
20
10
0
Increase in
NPAs
Increase in
Provisioning
Costs
Increase in
Restructured
Loan
Accounts
4
Rank
Percentage Respondents
Asset Quality Indicators
3
Agriculture
Infrastructure
2
Industry
Services
1
0%
20%
40%
60%
80%
100%
Percentage Respondents
Source: CII Survey on Health of Indian Banking sector in current regulatory environment
 Capital Adequacy: Basel III requirements & expected plan to raise Capital
At this juncture, maintaining requisite capital adequacy in a rising NPA scenario is the biggest
challenge for Indian banks. Under the Basel III guidelines, as determined by the Reserve Bank
of India, Indian banks will have to maintain a minimum common equity ratio of 8 per cent and
total capital ratio of 11.5 per cent.
RBI estimates that Indian banks will need around Rs 5 trillion to meet the Basel III targets. The
Government, which is the dominant equity holder of PSBs, would have to infuse equity worth Rs
90,000 crore over the next five years in order to retain its shareholding (at 58 per cent) in the
public sector banks to meet the Basel norms. Considering the current strain in Government
finances, this may put significant pressure on the Government’s fiscal consolidation plan.
According to the RBI, broad estimates suggest that for full implementation of Basel III, public
sector banks would require common equity to the tune of Rs 1.4 - 1.5 trillion on top of internal
accruals, in addition to Rs 2.65 - 2.75 trillion in form of non-equity capital. Major private sector
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CII Survey on Health of Indian Banking sector in current regulatory environment
------------------------------------------------------------------------------------------------------------------banks would require common equity to the tune of Rs 200-250 billion on top of internal accruals,
in addition to Rs 500 - 600 billion in form of non-equity capital.
In case of Public Sector Banks (PSBs), the need for capital infusion by the Government is
strongly pitched by majority (75 per cent) of the respondent banks. In addition, some banks are
also found to be considering to raise additional Tier I capital by way of raising of perpetual
bonds from the market. The shortfall in stipulated total CAR (Capital Adequacy Ratio) is seen to
be deteriorating with out requisite capital infusion by the Government as respondent PSBs are
expected to average their CAR between 12.8 per cent as on January 1, 2013 and 8.5 per cent
as on January 1, 2015. However, in case of private sector banks, the respondent banks are
found to be maintaining an average CAR of 12 -16 per cent during the same period. Follow-on
Public Offer and Qualified Institutional Placement are found to be the most preferred route to
raise additional capital for private banks.
For foreign banks, the Survey has revealed that most of smaller foreign banks are already well
capitalized to meet the Basel III targets whereas big foreign banks are expected to meet the
capital requirement through infusion of required capital from their respective head office.
GROWTH OUTLOOK
 Short-term Growth Outlook: Revision in Credit Rating of major Indian banks
Since the beginning of current fiscal (April 2012), leading credit rating agencies (S&P, Moody’s
Fitch, etc) have been raising concerns on the rising level of NPAs and restructured accounts of
Indian banks.
According to the Reserve Bank of India, the gross NPAs of the Indian banking system (as a
percentage of gross advances) at 3.1 per cent during FY12 (end March 2012) were the highest
in the last six years. An even bigger concern has been the growing threat of loans getting
restructured as high inflation and interest rates impact demand and reduce the pricing power of
the corporates.
Majority of the survey respondents (63 per cent) believe that the leading credit rating agencies
would consider to revisit the credit rating of Indian banks from negative to stable by the end first
quarter of next fiscal (June 2013). Amongst others, 25 per cent of the respondent banks expect
this scenario to take place in the second half of next fiscal (H2 FY 2013-14).
In addition, it is believed that the ratings of banks would depend on bank-specific factors as also
on the sovereign rating which acts as a ceiling for the international scale ratings of banks.
 Long-term Growth Outlook: Indian banking sector as the third largest globally by 2025
On the longer term outlook of the Indian banking sector, 78 per cent of the surveyed banks
foresee the Indian banking sector as the third largest globally by 2025. It is estimated that the
Indian banking sector will be able to leverage on the huge potential the domestic market offer.
The Indian banking sector is likely to be the fastest growing amongst the emerging economies
and could grow faster than China in the long run.
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CII Survey on Health of Indian Banking sector in current regulatory environment
------------------------------------------------------------------------------------------------------------------In the current scenario, increasing the core capitalization level of Indian banks (as per Basel III
requirements) is expected to supplement the expansion path of Indian banks catering to the
high funding needs of the Indian economy. According to the RBI, broad estimates suggest that
under Basel III, public sector banks would require Rs 5 lakh crore to meet the Basel III capital
requirement.
It is also expected that the banking sector assets would grow by about 18 – 20 per cent annually
assuming an economic growth of about 7 – 8 per cent. Given this expectation, the asset base of
the banking sector will enhance significantly from its current size.
EFFECTIVENESS OF MONETARY POLICY INSTRUMENTS
 Effectiveness of monetary policy instruments in the current macroeconomic scenario
(growth – inflation trade-off)
As per the survey findings, the growth - inflation balance is still precarious. Inflation is expected
to remain much higher than the RBI’s comfort level on the back of the pass through of fuel price
hikes. Hence the bankers feel that the RBI will be cautious about reducing rates substantially.
However, recent policy measures announced by the Government to reduce fiscal deficit and to
improve the supply side will provide comfort to the Central Bank to soften its stance going
forward.
With the implicit assumption that all three major monetary policy instruments (CRR, Repo rate
and SLR) are being used by the RBI to control inflation and promote growth, majority of the
respondent Banks feel that repo rate would be the most effective policy tool in the current
scenario of growth – inflation trade-off. 58 per cent of surveyed banks see repo rate as the most
potent monetary policy instrument followed by 34 per cent viewing CRR cut would be prominent
policy tool in present conditions.
Bankers views on effectiveness of monetary policy instruments
Repo Rate: As the repo rate continues to be the effective policy rate, this is perhaps the most
critical tool for policy currently. Bankers have expressed that the impact of repo rates gets
translated into the system immediately either increasing or decreasing the cost of funds.
Therefore, the repo rate can impact the inflationary trends much faster. Also, the recent policy
measures by the government to reduce fiscal deficit and improve the supply side will provide
comfort to the RBI to soften its stance on the key policy rate.
Cash Reserve Ratio (CRR): The banking sector feel that the recent cuts in CRR by the
Central Bank will significantly help ease the liquidity position in the banking system. However,
as liquidity continues to remain relatively tight (at least in spurts), CRR continues to be an
important tool for monetary policy and has a better potential impact on the deposit-loan pricing
mechanism in the industry. Bankers expect that any further reduction in CRR is likely to infuse
liquidity in the system to ensure credit flow to the productive sectors is not hampered.
Statutory Liquidity Ratio (SLR): Banking system generally maintains substantial portion of
assets in SLR and decrease by few basis points may not immediately infuse liquidity in the
system. Considering that currently a reasonable liquidity buffer is available in the system
through surplus SLR, any further SLR reduction may have a relatively muted impact.
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CII Survey on Health of Indian Banking sector in current regulatory environment
------------------------------------------------------------------------------------------------------------------Even as it was clear that majority of the Banks see repo rate as the most effective policy tool in
the current macroeconomic scenario, few respondents have said that CRR and SLR are
effective in managing liquidity and ensuring appropriate levels of liquidity while also making
monetary transmission effective whereas the repo rate could be used as an important signaling
tool.
As per the Survey findings, it is believed that the RBI is likely to keep liquidity comfortable
through a combination of CRR cut and Open Market Operations in the remaining part of the
fiscal. While should be understood that the CRR is already close to its historic lows which might
limit the extent of CRR cut going ahead whereas the Repo rate could be cut if inflation signals
downward movement.
CHANGES IN KEY POLICY RATES & TRANSMISSION EFFECT
 Changes in key policy rates through the end of current fiscal
In the above backdrop, 64 per cent of the respondent banks believe that the RBI would cut the
repo rate by at least 25 basis points in the remaining part of the current fiscal while the
remaining 36 per cent respondents were of the view that the central bank is not expected to
change its key policy rate through the end of current fiscal due to inflation concerns.
Among the other monetary policy instruments, majority of the surveyed bankers (82 per cent)
expected a reduction of another 25 basis points in the Cash Reserve Ratio by end March 2013
to counter the liquidity deficit in the system. This would be expected to comfort the bankers in
aligning their resources to productive sectors of the economy.
The Statutory Liquidity Ratio has been expected to remain unchanged by most of the
respondents (84 per cent) except for few foreseeing a reduction of 100 basis points in view of
the anticipated tightness in liquidity.
Banker's Expectations on Course of Monetary Policy
through end March 2013
Percentage
Respondents
100
80
60
No change
25bps
40
20
0
CRR
Repo
Source: CII Survey on Health of Indian Banking sector in current regulatory environment
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CII Survey on Health of Indian Banking sector in current regulatory environment
------------------------------------------------------------------------------------------------------------------ Transmission effect of reduction in RBI’s key policy rate (repo rate) to bank lending &
deposit rates in the current scenario
As outlined by the RBI in its Annual Report for 2011-12, in recent years there is significant
evidence that the interest rate channels and credit channels of monetary transmission have
been working effectively. Policy rate increases in India had a negative effect on output growth
with a lag of two quarters and moderating effect on inflation with a lag of three quarters. As
banks adjust portfolios, a 100 bps increase in policy rate was found to reduce credit by 2.8 per
cent in nominal terms and 2.2 per cent in real terms. As a result, banks are expected to follow
policy directions from the RBI through reduction in key policy rates, in bringing the interest rates
down.
Therefore, with respect to the effectiveness of the transmission mechanism of reduction in RBI’s
key policy rate (repo rate) on bank lending & deposit rates, 75 per cent of the respondent banks
believe that there is a strong likelihood by banks of passing the benefits of reduction in repo rate
with a corresponding decline in their benchmark prime lending rates. In case of deposit rates, 60
per cent of the respondent banks see a decline in deposit rates corresponding to a rate cut by
the Reserve Bank of India.
IMPACT OF KEY REGULATORY REQUIREMENTS ON BANK PROFITABILITY
 Key regulatory requirements & impact on profitability
The Survey analysis has revealed that the Basel III Capital requirements of banks is likely to
have the highest impact on profitability of the Indian banking sector. Among the other key
regulatory requirements, the revised guidelines on Priority Sector Lending and higher
provisioning norms for restructured assets would also have a major impact on bank’s profitability
as highlighted by the respondent banks.
Impact of key regulatory requirements on bank profitability
Basel III Capital
requirements
5
Revised Guidelines on
Priority Sector Lending
Rank
4
Higher Provisioning for
Restructured Assets
3
Management of IntraGroup Transactions and
Exposures
2
1
0%
50%
100%
25% of new bank
branches to be opened
in unbanked rural(tier 5
& 6) centres
Percentage Respondents
Source: CII Survey on Health of Indian Banking sector in current regulatory environment
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CII Survey on Health of Indian Banking sector in current regulatory environment
------------------------------------------------------------------------------------------------------------------Revised guidelines on priority sector lending (PSL)
The Survey findings point out that 60 per cent of banks are not satisfied with the revised
guidelines on priority sector lending (PSL) and believe that these new norms would not help in
better achieving the targets. On the whole the new norms are marginally tougher than the earlier
ones and shall put additional stress on achieving priority sector targets.
The respondent Banks were of the view that the reclassification of certain advances as SME
instead of agriculture and declassification of indirect financing to agriculture shall put some stress
on achieving priority sector targets for agriculture. In addition, while caps on housing loans will not
have much impact as the average loan in this category is largely within the set limits, foreign
banks with more than 20 branches are likely to face some difficulty.
Banker’s views on revised Priority Sector Lending guidelines
I Agriculture
Direct Agriculture: Cap of Rs 2 crore on loans to Corporate, partnership firm and cooperatives of farmers directly engaged in agriculture and allied activities, i.e. dairy
fishing, animal husbandry, poultry, etc will adversely affect in achieving agriculture
targets. Loans to Arthiays (commission agents in rural/semi-urban areas functioning in
markets/mandies) for extending credit to farmers is now no longer the part of priority
sector which would further impact the growth of priority sector advances.
Indirect Agriculture: Due to change in guidelines, loan to Corporate/partnership
firms/institutions/for direct agricultural activities will shift under indirect agriculture
category which would precariously place already stressed direct agriculture portfolio.
Loans to food and agro based processing units having investment in plant and
machinery up to Rs 10 crore shifted from agriculture to Micro & Small Enterprises
(MSE). It will adversely affect achievement of indirect agriculture.
II Micro & Small Enterprises
Service enterprises: Loans up to Rs 2 crore only are covered under this segment.
Earlier, there was no loan limit under this sector. As rising urbanisation will see greater
number of people shifting from agriculture to services, restrictions of this kind will take a
toll on the growth of the services sector. Also, for service sector to qualify as PSL the
cap is already available on amount of investment in equipments. Introduction of one
more cap will restrict flow to such enterprises.
III Foreign Banks
More than 20 Branches: Starting April 2013, export finance will not be treated as a
separate category for foreign banks with greater than 20 branches. Branches of foreign
banks have never been defined as size criteria. As the Reserve Bank of India note on
wholly owned subsidiarization speak about percentage of assets as the key criterion, a
level playing field for all foreign bank branches is desired and the definition should
continue by virtue of ownership rather than by number of branches.
Less than 20 Branches: For banks with less than 20 branches, network & reach have
always been the constraints in fulfilling targets for segments like Agriculture / MSME
sectors. The flexibility offered by the new policy will help such banks to lend as per their
core competence i.e. sectors of their choice. This will ensure efficient channelization of
funds to respective sectors and also have positive impact on credit quality of assets.
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CII Survey on Health of Indian Banking sector in current regulatory environment
------------------------------------------------------------------------------------------------------------------CONCLUSION
A robust and thriving banking sector is the backbone of a fast emerging economy like India. Since
the global financial crisis the regulatory environment for the banking sector has changed
significantly globally. In the Indian context, even as growth, inclusion and stability have been the
key focus areas, the current regulatory and policy environment is critical to ensure the banks
remain financially sound and profitable.
While the survey establishes that the Indian banking sector has the potential to become the third
largest globally by 2025, in the present scenario, majority of the Indian banks are standing at a
point of inflection with the impact of regulatory requirements felt on their financial health.
In today’s context, raising core capitalization level in a rising NPA scenario is the biggest
challenge for the Indian banking sector. It should also be understood that even as Basel III may
help increase the resilience of the banking system, the stringent capital buffers proposed would
be detrimental to the interests of developing countries like ours. High buffer requirements as a
counter-cyclical measure would translate into higher lending costs and consequently could have
an adverse impact on economic growth.
The survey projects a healthy level of credit growth in the next fiscal (20 per cent) which would put
tremendous pressure on banks to outpace internal capital generation and maintain the requisite
capitalization level as per Basel III regulatory requirement. Therefore, there is a high probability of
systemic support by the Government for capital infusions into some state-run banks. However,
with already strained government finances, this is expected to put significant pressure on the
Government’s fiscal consolidation plan.
The banking sector is also facing tremendous pressure on the asset quality. The Non-Performing
Loan (NPL) coverage ratio for Indian banks is the lowest in the Asia-Pacific region. It is also noted
that loan classification, especially regarding restructured loans, as well as provisioning
requirement practices in India is weak. Therefore, an even bigger concern is the growing threat of
loans getting restructured as high inflation and interest rates impact demand and reduce the
pricing power of the corporates.
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CII Survey on Health of Indian Banking sector in current regulatory environment
------------------------------------------------------------------------------------------------------------------ANNEXURE TABLES
 Annual forecasts for 2012-13 & 2013-14
S.No.
1
2
3
4
5
Table 1: Projections on Key Performance Indicators
Actual
Forecast
FY
FY
FY
FY
Key Performance Indicators
2010-11
2011-12
2012-13
2013-14
Credit growth
27
19
17
18
Growth in Deposits
16
14
14
17
Growth in Net Interest Income
29
17
17
19
Growth in PAT
24
23
14
21
Return on Equity
17
16
16
17
Source: CII Survey on Health of Indian Banking sector in current regulatory environment
S.No.
1
2
3
4
Table 2: Projections on Segment-wise growth in Credit Off-take
Forecast
Segment-wise growth in
FY 2012-13
FY 2013-14
Credit Off-take
Corporate loan
17
Retail loan
24
SME loan
20
Agriculture loan
23
19
23
20
21
Source: CII Survey on Health of Indian Banking sector in current regulatory environment
S.No.
1
2
3
4
Table 3: Projections on Growth in Credit Outstanding
Forecast
FY 2012-13
Growth in Credit Outstanding
Agriculture
20
Manufacturing
17
Infrastructure
19
Services
22
FY 2013-14
20
19
21
22
Source: CII Survey on Health of Indian Banking sector in current regulatory environment
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