The deteriorating asset quality continued for the banking sector mostly PSBs due to low demand and high interest rates resulting in higher slippages and restructuring. The total bad assets (gross) of public sector banks (PSBs) was Rs. 1,41,000 crore or 3.25% of total advances in the quarter ended September as against Rs. 1,23,000crore in Q1FY13. On the other hand, private banks reported a marginal jump of 22 basis points to Rs. 20,800 crore in Q2FY13 as compared to INR 19,900 crore in the June Quarter. The difference stemmed from the prudent lending practices of private banks.
The net interest margin-difference between yield on advances and cost of deposits reduced more for PSBs as compared to the private banks. On an average, the margins compressed by 40 basis points to 2.83 in Q2FY13 compared to a year ago period for the PSBs. The margins for private banks remained flat at 3.33%. The main reason for this is that higher slippages for PSBs resulted in interest income reversals lowering yields. Also, decrease in lending rates to spur growth and focus on low yielding retail loans in the absence of corporate demand affected margins.
In the absence of a rate cut and the challenging economic environment, fresh slippages and restructuring are going to continue in the next two quarters further deteriorating asset quality and putting profitability under strain. However, if an interest rate cut happens in the January quarter, there might be a marginal improvement in the repaying capacity of corporates thereby improving asset quality. But significant improvements in asset quality will be seen only in the first quarter of next year.