Why are banks caught in a cleft

It's certainly not a good time to be a banker, says the chief executive of a private sector bank.

While he claims the bank is comfortable with the quality of loans it disbursed to stressed sectors, fears of something going wrong often give him sleepless nights.

"When I get my newspapers every morning, I quickly scan those to see if any of my large borrowers is mentioned in the news.

"Our asset quality is fairly strong and has been improving in the past few quarters.

"But given our size, we cannot afford to allow any of our large accounts to turn non-performing.

"It would create havoc for us," he said, requesting anonymity.

Bankers say amid the uncertain macroeconomic environment, their greatest worry is the stress on asset quality.

"Non-performing assets are the biggest concern for the banking industry.

"For us, it is the only concern . . . The problem is outside the banking industry," said Diwakar Gupta, managing director and chief financial officer at State Bank of India.

The country's largest commercial bank reported a whopping 137 per cent rise in net profit in the April-June period, only to see its shares tank on asset quality worries.

"The problem is (sometimes) outside the borrowers' control. Low demand, the inability to pass on rising input costs, low profitability and delayed receivables are some of the factors contributing to this situation.

"We hope our asset quality improves in the coming quarters," Gupta said.

Earlier this month, Axis Bank, India's third-largest private sector lender, told its investors it was increasing its guidance on incremental slippages and restructured loans 25 per cent to Rs 5,000 crore (Rs 50 billion), analysts told Business Standard.

Most bankers admit pressure on asset quality is likely to intensify, with visible stress in sectors such as power, telecom, aviation, and real estate and alleged scams in the allocation of coal blocks and 2G telecom licences.

"It just refuses to die. You had GTL, then Kingfisher, and now Deccan Chronicle.

It is tough to be a banker," said the executive director of a public sector bank.

While asset quality

is a major worry, it is not the only one for bankers. Loan demand continues to remain tepid, with companies refusing to borrow money at high rates and refraining from commencing capital-intensive projects.

This has prompted a few to predict bank credit would grow at its slowest pace in about a decade.

"We believe the moderation in growth is likely to be accentuated . . . We could see loan growth in 2012-13 moderate to 14 per cent, which would be a 14-year low," Rajeev Varma and Veekesh Gandhi, analysts with Bank of America Merrill Lynch, wrote in a note to clients.

It is difficult for bankers to cut lending rates to propel loan demand, as the high cost of deposits is already straining net interest margins.

Most lenders have started reducing deposit rates to ease the burden on margins and make room for lending rate cuts.

However, analysts feel most banks would see erosion in margins, as the lower rates would only be applicable on new deposits.

"In our view, the pressure on margins would continue in 2012-13, as yields on loans are likely to be under pressure, given the reduction in lending rates and waning price power due to lower loan growth.

"In our base case, we have assumed a margin decline of 15-20 basis points," Alpesh Mehta, analyst with brokerage Motilal Oswal Securities, wrote in a note to clients.

Mehta feels only lenders with a high proportion of deposits maturing in the second half of this financial year (Andhra Bank and Central Bank of India) would be able to prevent a decline in net interest margins.

As if these hurdles don't make the lives of bankers difficult enough, there is also the regulatory overhang of higher capital needs.

As per estimates released by Reserve Bank of India, banks would need about Rs 5 lakh crore (Rs 5 trillion) to meet  new Basel-III-capital norms.

While on record, most bankers say raising the additional capital would not be a daunting task, as they would have time till March 2018, in private, they agree market sentiments need to improve before they can raise funds.

So, is there any silver lining for bankers in this period of uncertainty? "Certainly.

"The attrition rate has come down sharply. Retaining people is not a big challenge, as job offers are hardly there," said the chief executive of the private bank.