BT-India's Best Banks-2008

Countries covered: India September 2008 is likely to be remembered as the month that saw the collapse of the financial world, as we knew it. Icons of Wall Street went belly-up, lost their identity by converting themselves into commercial banks, sliced themselves up into pieces or were forced by regulators to merge with other banks. A large number of marquee names are now owned by governments. Wall Street will never look the same again...

Additional Information

Executive Summary: Amongst all this global turmoil, there is a positive outlook for India. As we analysed the audited results (2007-’08) of banks in India for the Best Banks Survey, we could not but compare the strength of the Indian banking system to the over-leveraged banks in the US and Europe. In the previous year’s assessment (Business Today, February 24, 2008) we had decided to add more weight to the strength parameters vis-a-vis the growth and size parameters. Time has proven us right.

The World Order Changeth?

China and India have suffered— what can only be called—collateral damage. China, due to its direct linkage to diminishing demand in the West for its massive exports, and India, due to the consequential damage resulting from the significant pullout of investments by global investors from its capital markets. However, given the massive war-chest of China, the macroeconomic structure of India and the relatively insular nature of their large banks, the two seem to be relatively less damaged.

Indian Banks’ Finest Hour?

The KPMG Annual Best Banks Survey is a check-point on the performance of the banking system in India. The past five years have seen the Indian banking industry gain significant strength. This strength is reflected in the high growth in credit and size of the balance sheets; well diversified portfolios across corporate, retail and SME; improved margins and spreads; healthy asset quality; reduction in non-performing assets with improving asset coverage ratio; and improvement in the implementation of the SARFAESI Act through effective use of debt recovery tribunals.

Consolidation Ahoy!

Capital requirements and management is one of the most critical challenges Indian Banks are likely to face over the next few years. Most banks are adequately capitalised— the median capital adequacy ratio for large banks in 2007-08 was 12.34 per cent as against 12.02 per cent a year ago. The RBI estimates an additional requirement of Rs 10,000 crore over the next five years to support continued credit growth at 12 per cent capital adequacy.

Low-cost Borrowings Are Back

Most Indian banks have established a strong franchise to raise low-cost deposits. The ability to grow that base is critical to their effective management of the balance sheet for maintaining adequate liquidity, lower their cost of borrowing and subsequently higher net interest margins and finally for establishing a diversified risk-based asset product portfolio.

The weaker and smaller banks are likely to face significant challenges in attracting low-cost deposits in a tight liquidity scenario, impacting their ability to grow, as will banks that have a significant proportion of their funding through bulk deposits.

Wither Asset Quality?

The global crisis and the resultant slowdown in the Indian economy is a real test for Indian banks in terms of the asset quality of their existing portfolios and for any new business that they are willing to undertake. The asset quality of Indian banks has shown substantial improvement in recent years—median Net NPA improved 0.73 per cent as against 0.83 per cent in ’07. However, 2008-09 has the potential to reverse this trend.