The Hindu Business Line : Liquidity adequate to support 25 pc credit growth: Crisil

An assessment
Monetary tightness in the second half of 2005-06 has eased
Interest rates will rise steadily, not sharply
Core profitability should remain stable in the medium term

Mumbai , Aug. 29

Given normal deposit growth, liquidity is adequate to support an overall credit expansion of 25 per cent, according to a Crisil review of the Indian banking system.

The monetary tightness in the second half of 2005-06 has eased, said a Crisil release.

Interest rates will rise steadily, not sharply, according to Crisil, which expects a 25-50 basis points rise in deposit rates linked to a 50-75 basis points mark-up in lending rates, said Mr Krishnan Sitaraman, Head (Financial Sector Ratings).

Deposit growth

A 16 per cent deposit growth rate and a marginal reduction in the investment portfolio can support a 25 per cent credit expansion in 2006-07, while maintaining the SLR portfolio at 30 per cent for the system.

However, some private banks currently maintaining SLRs at 26-27 per cent will need to mobilise resources to fund credit growth, he added.

Currently, the interest spread is put between 2.6 per cent and 3.2 per cent with the banks hiking loan rates. Core profitability should remain stable in the medium term, with net profitability margins exceeding 1.5 per cent. The increase in non-performing loans and capital coverage of bad loans would be at acceptable levels.

Recoveries

"Recoveries were around Rs 5,000 crore last year and are being favoured by banks to reduce NPAs," said Mr Sitaraman.

He admitted that the current asset quality is better than ever before. "Even if the asset quality deteriorates, it won't impact core profitability, because of the strong capital adequacy ratio and robust credit growth, among other factors."

He added: "After a decade of improvement, asset quality in India's banking sector is superior to that of other leading Asian economies, including China, Malaysia and Indonesia."