Warning banks on interest rates risks, high transaction costs and NPAs, credit rating agency ICRA on Wednesday said Indian banks are yet to attain global standard in profitability and productivity despite posting over 40 per cent growth in net profit at over Rs 6,684 crore (Rs 66.84 billion) in the first half of this fiscal.
"Although banks have continued to profit from their investment in G-secs because of the decline in interest rate, they face risk arising out of the possibility of interest rates moving up," ICRA said in a report on banking industry.
The Reserve Bank of India has asked banks to build up investment fluctuation reserves of a minimum 5.0 per cent of their investment but it was less than 2.0 per cent as on June end, ICRA said.
While lauding banks for their growth in profits, ICRA said: "While there has been a significant improvement in performance of PSU banks, not much concerted effort has so far been made to restructure them."
"As a result, the profitability and productivity of PSU banks still fall short of global standards. Intermediation costs are high and therefore the nominal lending rates are also high, to the extent that a high cost banking system could become a drag on the economy," it said.
Although there has been no instance of systemic crisis, contagion, bank closures or bank runs, ICRA said this should not divert attention from the problems of high and unresolved NPAs, inadequate management skills and relatively volatile operating performance.
