New Delhi, Dec 19: Borrowing money from banks
generally became a costly affair in 2006, although higher
credit growth, hardening interest rates, deposit mobilisation,
consolidation and strikes grabbed newspaper headlines for most
part of the year.
Loans for all segments, including home, car, personal
consumption and corporates, became costlier by 1-2.5 per cent
in 2006 and the upward pressure still continues due to excess
demand for credit and higher inflation.
Interest rates kept lenders and borrowers on their toes
as Reserve Bank raised key short term interest rates four
times and cash reserve ratio once to moderate credit growth
and contain inflation this year.
Hardening of interest rates and low deposit growth pushed
deposit rates by 1.5-2.5 per cent to the pleasant surprise of
investors, as they could get tax incentives for deposits too.
Banks are now giving 8-9 per cent interest for term
deposits even as they try to mop up more resources from
savings and current accounts, the cheapest source of funds.
Acquisitions and mergers took a new turn this year with
three small domestic banks getting merged with larger lenders,
while a deal has been signed to buy a foreign bank.
Ailing United Western Bank was merged with IDBI,
Centurion Bank of Punjab acquired Kerala-based Lord Krishna
Bank, ICICI Bank is buying out Sangli Bank, while Bank of
India has signed an agreement to buy an Indonesian lender Pt
Bank Swadesi.
Banks improved performance on parameters like profit,
business and customer service this year, which also saw higher
capital mobilisation to meet best global capital adequacy
norms, sustain growth, fund expansion and acquisitions.
Buoyant economy, with GDP growing by 9.1 per cent in
April-September, helped banks improve performance and
investors were optimistic about the banking stocks.
However, there was some negative impact on banking stocks
after RBI raised CRR, the amount of depositors money that is
parked with the central bank, by 0.5 per cent on December 8,
on fears that banks` profitability could be under pressure as
they would have less funds to lend.
Banks have also started responding to the CRR hike, the
last RBI monetary action this year, by further raising lending
and deposit rates by 0.25-0.75 per cent.
Despite a 1-2.5 per cent increase in cost of deposits,
banks were able to significantly increase interest income due
to higher demand for credit from the middle class.
With demand for credit growing at above 30 per cent for
the third year in a row, sectors like housing, commercial real
estate and retail loans accounted for most of the bank credit.
To address concerns over signs of "overheating" in
certain sectors, RBI capped the total capital market exposure
of a bank at 40 per cent of its net-worth and imposed certain
restrictions on vulnerable segments like real estate.
Deposit growth at 20 per cent, did not keep pace with
strong credit growth, leading to shortage of funds to lend.
Banks are focussing on deposit mobilisation as borrowing
from RBI to meet fund requirements, has become costly.
Though all banks, except Sangli Bank, were comfortable
from capital adequacy point, RBI has extended the deadline for
implementation of Basel II norms to March 2008 and 2009 for
banks with overseas presence and other banks respectively.
Small banks have got more time to either shore up capital
base to cover operational risks or find a suitable buyer as
competition will hot up from 2009 when most restrictions on
foreign banks are likely to be lifted.
Banks raised Rs 41,000 crore capital through debt,
private placements and public equity issues. Besides, a
significant amount was mopped up from abroad after RBI allowed
banks to raise Tier I capital through innovative tools like
perpetual bonds.
RBI took many steps to safeguard customers interests by
making regulations strict on reasonableness of bank charges,
protection of customers rights, enhancement of service
standards and transparency in credit card billings.
As consolidation eluded due to employees` resistance and
coalition politics, PSU banks like Oriental Bank of Commerce,
Indian Bank and Corporation Bank struck an alliance to pool
resources to provide better services, do business and face
competition.
Experts like former RBI Deputy Governor S S Tarapore were
critical of government ownership of PSU banks as this deprives
them of adequate capital and freedom to operate efficiently.
There were also allegations about finance ministry
influencing banks not to raise interest rates when there was
pressure on margin due to hardening of rates in august.
The productivity of PSU banks were less compared to their
private peers, so management is now overhauling the image of
the banks, besides implementing modern technology and offering
host of value-added products like insurance.
Like in any other sector, reforms faced resistance from
unions, which are backed by political parties.
There were at least four nationwide strikes in 2006, the
longest being the week-long SBI employees and officers strike
over pension in April, that put people to great difficulties.
Three other strikes paralysed nationalised banks in July,
October and December.
Customers are less tolerant to strikes and PSU banks and
employees have to keep this in mind when it is difficult to
retain existing customers and get new ones.
Bureau Report
