Rating Agency Crisil has conducted a study on banking sector in India. The agency has pointed out that there will be a decline of 20 basis points. The NPM is expected to remain at 1.4% for year 2007-08. During year 2004-05, the NPM was at 1.83% and has been declining since then.

As the margins of banks will be under pressure, there may be strong interest rates on loans for business and personal accounts. The demand for credit is growing across all sectors and banks may find it bit difficult to raise funds at low interest to meet the rising demands.

The study has stated that banks may see a reduction in their core profits for the current year. The core profitability of banks was higher during year 2000 – 2005 as the interest rates were less and operating costs were lower. After 2005, the situation has changed and banks sector may be under pressure in next couple of quarters. Banks may cover up the losses by offering some additional services and getting into new sectors. Some banks have also started offering Insurance schemes, Credit cards, Mutual Funds and other services by making tie-ups with industry leaders.

The study further added, “These fluctuating fortunes are expected to continue in 2007-08 and another decline in profitability appears to be highly likely.”

Core profitability of Indian banks had fluctuated in recent years. During 2000-01 to 2004-05, banks reported an increase in profitability margins, backed by steady interest spreads, reducing operating expenses, and stable, though low fee-based incomes.

Increase of 2% for cash reserve ratio (CRR) in past few quarters has increased the overall cost of resources for banks.

However, the asset quality of Indian banks, has improved a lot over the past seven years. Most banks have managed to reduce their non-performing assets considerably.

Banks are looking forwards to see revised terms for excess statutory liquidity ratio (SLR). As per the current SLR norms, banks have to park 25% of their deposits in government securities. The average SLR ratio of the system is around 28% and reducing the limits may help banks to cover up the rising credit demands.