Retail biz holds key for banking sector growth


The concerns of banking Industry are amply evident in the Q1 results of FY-14 announced by State Bank of India (SBI) on Monday, perhaps the last in...

Banks should make serious efforts to focus on resurrecting the asset quality; DBT will go a long way in popularising the culture of electronic banking

Dr K Srinivasa Rao

The concerns of banking Industry are amply evident in the Q1 results of FY-14 announced by State Bank of India (SBI) on Monday, perhaps the last in the league of large banks. The burgeoning stress on the asset quality, piling restructured loan portfolio, sticky recovery outcomes seem to impact the performance. The period of April-June (Q1) every year is a generally a lean season. During the three-month period, banks have recorded a five per cent incremental rise in deposits and 2.9 per cent growth in credit.

Consequently the credit Deposit (CD) ratio of banks dropped from 77.43 per cent in March 2013 to 76.37 per cent by June 28, 2013. The incremental CD ratio in Q1 has recorded 45.45 per cent. Reserve Bank of India has projected a growth in deposits at 15 per cent and credit growth of 14 per cent for the current fiscal. The market and stake holder reproach is evident from the performance of bank stocks after the announcement of quarterly results.

Big or small, all banks have commonly demonstrated rise in delinquency rates in the loan portfolio. The rise in restructured loan portfolio and pressure of additional provisions has added to the woes. The consequent rise in provisioning against Non Performing Assets and tardy incremental growth in business in varying measures impacted the bottom line of many banks. As per S&P, banking sector's non-performing loan ratio is likely to surge to 3.9 per cent of the total loans this fiscal and to 4.4 per cent in the next financial year from 3.4 per cent during last fiscal. It has forecast that the deteriorating asset quality and earnings are likely to constrain credit profiles of banks over the next two years. Keeping these asset quality challenges, banks have been making concerted efforts to recover loans. The continuous surveillance and monitoring mechanism of loans are getting realigned with more proactive actions to prevent further deterioration in the quality of assets.

Sensitive to the shrinking margins under rising resource cost, it is evident from the first quarter results of banks that they have begun to shrink their pool of bulk deposits obtained at higher interest rates. The increased focus on mobilizing current and savings bank accounts (CASA) and retail term deposits by harnessing the synergy of financial inclusion efforts are set to yield positive results in due course. Similarly, banks with improved technology led operational efficiency and aggressive outbound marketing network are making efforts to scale up their low cost liabilities and shoring up retail assets. Specific efforts are also getting shifted towards mid corporate, small and medium industries and agriculture sector.

Thus in order to cope with the current macroeconomic environment, banks seems to be gearing up with new business strategies. The priorities have seen a shift. Compared to earlier, it is increasingly difficult to get finer interest rates on deposits and concessions in loan pricing from banks. Since the market itself is moving towards a neutral stance in pricing in defending their bottom-line, the competition in banks is now more reinforced towards quality, speed and operational efficiency in providing customer service.

The common philosophy among banks, more particularly the public sector peers, is to enlarge customer base and connect with large number of retail customers. Educating them to use alternate delivery channels such as internet banking, ATMs, POS terminals, etc., and to provide convenience banking are forming part of operational strategies to improve usage of technology. The interoperability of BCs and persuasion of flagship scheme of Direct Benefit Transfer (DBT) will go a long way in popularizing the culture of electronic banking, more particularly among the urban poor and hinterland.

The fresh wave of tilt towards retail can help connect the unbanked population with the main stream banking and widen the customer base. Such move if pursued on sustained basis can not only provide better risk adjusted returns but also can put the financial inclusion infrastructure to optimum use. Once the rural masses get used to the luxury of using alternate delivery channels, banks can get long term economies of scale. Therefore, in the emerging business challenges, banks should make serious efforts to divert concerted focus on resurrecting the asset quality and bank on retail business. In the meantime, the upcoming busy season can prop up demand for commercial credit, reopening diversified vistas of growth. Rightly so, banks are on a steady retail trajectory to continue to pursue growth.

The author is General Manager – Strategic Planning, Bank of Baroda, Mumbai. The views are his own.

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