Hello Friends,

I'd like to share this Article I read today in desicritic. Do you agree to this? What is your analysis of the banking sector as presented in the article.


RBI recently published a report on trend and progress of banking in India (2006-07). This has information on the entire banking industry (scheduled commercial banks, co-operative banks, regional rural banks) as well as NBFCs.

There are a total of 82 scheduled commercial banks(SCBs) and the RBI categorises them into four broad categories - public sector banks(28), old private sector banks(17), new private sector banks(8) and foreign banks(29). Some of the salient features of the report are (data for scheduled commercial banks only):

    Aggregate advances grew 30.6% as compared to 31.8% in 2005-06 and 33.2% in 2004-05.
    Aggregate deposits grew by 24.6% as compared to 17.8% in 2005-06
    Lending to sensitive sectors (defined by RBI as capital market, real estate, commodity) : Exposure to sensitive sectors was 20.37% of advances as compared to 18.84% last year. 20.37% is broken down as 18.71% to real estate sector, 1.55% to capital market and 0.11% to commodities.
    Net NPAs as a % of net advances declined to 1.0% from 1.2% in 2006
    Net profits increased by 27% as compared with 17.3% in 2005-06
    CRAR of all SCBs remained at 12.3% as it was the previous year despite a significant increase in risk weighted assets, well above the minimum RBI
    requirement of 9%
    Tier I CRAR ratio declined to 8.3% from 9.3% of 2005-06 (due to slower growth in reserves and surplus) but Tier II CRAR increased to 4.0% from 3.1% of 2005-06. Still, Tier I CRAR is above the minimum of 6% prescribed by RBIThe report looks good in an overall sense but if we just focus on the section of new private sector banks (essentially comprising of Centurion Bank of Punjab, DCB, HDFC Bank, ICICI Bank, IndusInd, Kotak Mahindra Bank, Axis Bank and Yes Bank), there are some serious issues that crop up. Let me just point out a few facts in this regard with respect to new private sector banks:

      CRAR of new private sector banks, which had improved in 2005-06 to 12.60%, declined to 12.00%, below the industry average of 12.30% in 2006-07
      Lending to real estate is highest among new private sector banks at 32.30% of their advances. This is quite a high figure - imagine that 1/3rd of the bank's lending is to real estate sector
      Net NPAs as a % of advances increased from 0.8% in 2006 to 1.0% in 2007
      Provisions made for NPAs increased by a whopping 39.43% in new private sector banks as compared to a 6.23% decrease for all SCBs
      Spread on assets for new private sector banks was 3.2% against 3.3% for all SCBs - lowest among all bank categories
      Operating profits of new private sector banks jumped by 46.7% as against 21.2% for all SCBs, the highest increase % among all bank categoriesWhat does the above imply? How do we reconcile the fact that the net profits are growing, spreads are not really that great, NPAs have risen and lending to sensitive sector is very high for new private sector banks?

      The answer is simple but not comforting - all deals done by private sector banks have a component of upfront fees in addition to the regular interest that is charged on the loan. These upfront fees are usually structured in such a way that they are a significant chunk so that this income can be booked for the quarter in which the deal is done.

      If the interest rate were higher, the money would come in over the life of the loan and structuring rates with a heavy upfront fee ensures higher incomes booked at the time of deal initiation. And this is a structure that is accepted by a lot of real estate developers and they are willing to pay the higher upfront. The core interest rate charged to real estate developers would also be higher due to the fact that there is a higher risk weight attached to the asset.

      So what is the outlook? RBI is heavily coming down on lending to real estate and these banks would be forced to prune their real estate exposure and this would surely impact their bottomline. The real estate prices have marginally softened in the last six months due to lesser demand from individuals but has not seen a significant dip due to the fact that the developers are not willing to cut prices, even though the sales figures have gone down.

      And RBI is in no mood to cut interest rates and hence sooner than later, these developers would have to cut prices. And that would affect their repayment capability and this could create more NPAs for these new private sector banks in the coming months.

      Stock prices of the new private sector banks are hitting all time highs - but it is time to be cautious on these names.
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  • Very Informative Post. I do agree that the rampant fuding to Real estate developers by Banks & NBFC need to be controlled.
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  • RBI May Formulate Strict Norms for Banking Applicants with Exposure to Real Estate

    The Reserve Bank of India (RBI) may have to go easy on its suggestion of not granting new banking licences to those groups which have exposure to the real estate sector. The central bank had in a discussion paper indicated that the groups with real estate exposure may find it difficult to obtain new banking licences. However, with most of the new applicants having exposure to the real estate sector, sources said, the RBI may not be able to disqualify them from getting new licences. In such a case, the RBI may have to formulate strict norms for new banking applicants with exposure to the real estate sector. On Thursday, three deputy governors of the RBI — Usha Thorat, Subir Gokarn and KC Chakraborty — met with top officials from the financial services sector to get their feedback on the new bank licensing norms the central bank is working on.
    During the two-hour discussion, “about three-fourth of the time was spent on discussing the real estate sector exposure of new applicants,” said an official who attended the meeting. Besides the issues relating to real estate exposure for banks — something that has been a cause for concern for the central bank — the other points discussed were the shareholding pattern and foreign holding in new banks, whether to convert NBFCs into banks under the new norms or to allow them to float one, and also, what should the minimum capital requirement be. During the meeting, it was pointed out that most of the corporate houses which are likely to vie for new licences from the Reserve Bank of India (RBI) also have realty companies within the group structure.
    For example, the Tata Group has exposure to the real estate through Tata Realty & Infrastructure. Likewise, Mahindra & Mahindra, which is trying for a banking licence through Mahindra & Mahindra Financial Services, has exposure in the realty sector through Mahindra Lifespace, Reliance Capital has Reliance Property Developers, Indiabulls Group has Indiabulls Real Estate, the Religare Group has Religare Realty and L&T has L&T Urban Infrastructure. Indiabulls had shown interest to float a bank under the new regime but has now said it would most likely stay away from full-fledged banking. On NBFCs, the RBI would most likely allow them to sponsor banks, rather than convert into banks.
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