Report on Trend and Progress of Banking in India 2010-11

The Reserve Bank of India today released the statutory Report on Trend and Progress of Banking in India 2010-11 (www.rbi.org.in/scripts/AnnualPublications.aspx?head=Trend and Progress of Banking in India&fromdate=13/11/2011&todate=15/11/2011) . This Report reviews the performances of the global and Indian banking sectors and presents the salient policy developments relating to each of these sectors during 2010-11. Within the domestic banking sector, the Report entails a comprehensive analysis of commercial banks, cooperative banks, and non-banking financial institutions.

The key messages of the Report are set out below:

Perspectives on the Indian Banking Sector

• During 2010-11, banks were able to improve their profitability and asset quality. Stress test showed that banking sector remained reasonably resilient to liquidity and interest rate shocks (para 1.2, pages 1-2).

• Yet, there were emerging concerns about banking sector stability related to disproportionate growth in credit to sectors such as real estate, infrastructure, NBFCs and retail segment, persistent asset-liability mismatches, higher provisioning requirement and reliance on short-term borrowings to fund asset growth (para 1.23, page 8).

• At the present juncture, the key issues related to the Indian banking sector include:

• prospective migration to Basel III while upgrading the existing risk management practices under Basel II;

• transition to International Financial Reporting Standards (IFRS) and required upgradation in information technology and human resource infrastructure;

• improvement in corporate governance practices in banks; and

• the overall need to become more competitive on the back of scale, scope, prudence and knowledge to be able to efficiently serve the needs of the economy and to exploit emerging opportunities, particularly with regard to financial inclusion (para 1.4-1.9, pages 2-3; and para 1.14-1.17, page 5).

Global Banking Developments

• The year 2010-11 was a difficult period for the global banking system, with challenges arising from the global financial system as well as the emerging fiscal and economic growth scenarios across countries (para 2.4, page 11).

• Global banks exhibited some improvements in capital adequacy but were beleaguered by weak credit growth, high leverage and poor asset quality. In contrast, in major emerging economies, credit growth remained at relatively high levels, which was regarded as a cause of concern given the increasing inflationary pressures and capital inflows in these economies (para 2.28, pages 23-24). 

• In the advanced economies, credit availability remained particularly constrained for small and medium enterprises and the usage of banking services also stood at a low, signalling financial exclusion of the population in the post-crisis period (para 2.21, page 20).

• On the positive side, both advanced and emerging economies, individually, and multi-laterally, moved forward towards effective systemic risk management involving initiatives for improving the macro-prudential regulatory framework and reforms related to systemically important financial institutions (para 2.33, page 25).

Policy Environment

• Banking sector policy during 2010-11 remained consistent with the broader objectives of macroeconomic policy of sustaining economic growth and controlling inflation (para 3.2, page 32).

• The Reserve Bank introduced important policy measures of deregulation of savings bank deposit rate and introduction of Credit Default Swap (CDS) for corporate bonds. It initiated the policy discussions with regard to providing new bank licenses, designing the road-ahead for the presence of foreign banks and holding company structure for banks (para 3.6, page 32; para 3.29, page 39; para 3.31, page 40; para 3.97, page 53).

• The process of migration to the advanced approaches under the Basel II regulatory framework continued during 2010-11, while also facilitating the movement towards the Basel III framework (para 3.23, page 38).

• Financial Inclusion continued to occupy centre stage in banking sector policy with the rolling out of Board-Approved Financial Inclusion Plans by banks during 2010-11 for a time horizon of next three years (para 3.21, page 37).

Operations and Performance of Commercial Banks

• The consolidated balance sheet of SCBs recorded higher growth in 2010-11 as compared with the previous year. This was in contrast to the trend observed during the last two years and signaled a revival from the peripheral effects of the global financial turmoil (para 4.4, page 60). 

• Deposits registered higher growth in 2010-11 but Current Account and Savings Account (CASA) deposits, which are least-cost sources, recorded deceleration. Loans and advances recorded a higher growth in 2010-11 despite widespread concerns with regard to slowdown in credit off-take in the context of tight monetary policy (para 4.6 and 4.11; pages 60 and 63).

• There was no significant shift in the maturity profile-wise composition of assets and liabilities of the banking sector in 2010-11 indicating the persistence of asset-liability mismatches (para 4.20, page 67).

• The consolidated net profits of the banking sector recorded higher growth in 2010-11 primarily attributable to increase in interest income leading to an increase in the Return on Assets (RoA) of SCBs (para 4.30, page 71).

• The Capital to Risk-Weighted Assets (CRAR) ratio under both Basel I and II frameworks remained robust and well above the required minimum of 9 per cent. There was an improvement in the asset quality of the banking sector in 2010-11 over the previous year (para 4.35 and 4.36, page 74).

• The process of financial inclusion improved in 2010-11 over the previous year in terms of various indicators of access and usage of banking services. Yet, in terms of percentage of population having deposit and credit accounts, the level of financial inclusion remained at staggeringly low levels (para 4.90, page 95). 

Developments in Cooperative Banking

• As an outcome of the ongoing consolidation process, there was a further decline in total number of Urban Cooperative Banks (UCBs) in 2010-11. During 2010-11, the balance sheet of UCBs expanded mainly on account of growth in borrowings followed by growth in loans and advances (para 5.16-5.20, pages 110-112).

• Net profits of UCBs improved in 2010-11 as compared to the previous year owing to higher growth of their total income. During 2010-11, the gross as well as net NPA ratio of UCB sector declined. Almost 90 per cent of UCBs reported CRAR of more than 9 per cent in 2010-11 (para 5.21-5.24, pages 112-113).

• During 2010-11, net profits of StCBs declined mainly due to slower growth of income. There was a decline in NPAs of StCBs as at end-March 2010, both in absolute and percentage terms (para 5.37-5.41, pages 118-119).

• As at end-March 2010, almost 43 per cent of Primary Agricultural Credit Societies (PACS) operating in the country were loss-making (5.45-5.50, pages 120-122).

Non-Banking Financial Institutions

• The financial performance of Financial Institutions (FIs) deteriorated during 2010-11 mainly due to decrease in operating profits and net profits. There was a sharp rise in operating expenses during the year mainly on account of wage revision (para 6.14, page 135).

• The financial performance of Non-Banking Financial Companies - Deposit taking (NBFCs-D) witnessed improvement as reflected in the increase in their operating profits during 2010-11 (para 6.35 to 6.37, pages 144-145).

• The financial performance of Non-Banking Financial Companies – Non-Deposit taking Systemically Important (NBFCs-ND-SI) improved significantly as reflected in the increase in their net profits during 2010-11 (para 6.45, page 148).

In sum, the Report conveys that despite challenges, banking sector in India can look forward to enormous opportunities in their quest for long-term growth. In the long-term, banks need to build on four principles, viz., efficiency, stability, transparency and inclusion. The banking sector needs to focus on growth through inclusion, innovation and diversification while complying with domestic regulations and internalising international best practices.

Alpana Killawala
Chief General Manager

Press Release : 2011-2012/749