Strong credit growth affected bank's profitability: study

Mumbai, Sep 10 (UNI) Strong credit growth and associated risks on asset quality has resulted in a significant 0.2 per cent decline in the profitability of banks, according to a study conducted by Crisil.

Banks have met a decline in profit margins, which dipped to 1.4 per cent in 2007-08 from 1.6 per cent in the previous year, marking a decline of over 20 basis points.

The study points out a major fluctuation in the profitability of Indian banks in recent years. During the period 2000-01 to 2004-05, banks reported increase in profitability margins, backed by steady interest spreads, reducing operating expenses, and stable low fee-based incomes.

However, from a peak level of 1.83 per cent in 2004-05, it declined sharply in 2005-06 and recovered some lost ground in the followed year, it says.

This apart, an increase in the repo rates by 175 bps in the last couple of years and 2.0 per cent hike in cash reserve ratio (CRR), increased the overall cost of resources for banks.

However, the higher interest rates are likely to soften either by Reserve Bank of India (RBI) slashing repo rates or with a cut in the RBI mandated SLR investment.

Crisil conducted the study for Federation of Indian Chambers of Commerce and Industry (FICCI).

UNI