Indian banks put forth an outstanding performance during the last couple of years. This is commendable given the fact that credit offtake remained poor. The high profitability of the banks was due to gains from their treasury operations. However, this raises a serious concern, as commented by the RBI. How long will the banks rely on retail banking and treasury operations to boost their profitability? What are the other challenges ahead for the Indian banks? How equipped are the Indian banks to deal with these challenges? Read on.
The fiscal year 2002-03 was the most happening year for the Indian banking industry. The industry was able to post extraordinary results on multiple frontshigher incomes and lower expenditure, profitability growth, declining NPA levels, improved return on assets, successful IPOs of PSBs, and high valuations to banking stocks. During the year, the income of Scheduled Commercial Banks (SCBs) rose to 14.1%, higher than the average growth rate of 12.1% for the period 1997-2002. At the same time, the expenditure of the SCBs stood at 11.4%, lesser than the average annual growth of 11.7% for the period 1997-2002. The net profits have witnessed an increase of 47.5% (Rs.17,077 cr from Rs. 11,576 cr in 2001-02). The return on assets has also risen significantly to 1%, which is the highest in the last six years. On account of all these factors, the valuations of bank stocks have also soared high in the stock markets.
Much of the profits of the Indian banking sector is on account of retail banking and treasury operations. In spite of the economic slowdown and industrial sickness, banks have been able to record profits on account of shift in focus.
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