SAHIL RIAZ

P152050

Macro-economics Factors Affecting Banking Industry

Performance over last few quarters

There has been a concern over the decreasing asset quality over the last few quarters which is attributed to a slower growth in the economy. Inadequate credit appraisal processes of banks, particularly PSBs, led to a disproportionate rise in the NPAs. Net interest income growth is expected to be flat in the wake of the weak lending growth.

Macro-economic Factors

a. Geo-political tensions: The Greece crisis and the Chinese economy spiraling downward, may result in capital outflows from India. Also, there is a continued uncertainty about the timing and pace of the rising interest rates of US, and the further implications of this for monetary policy decisions in emerging markets.

b. Inflation: Monsoon revival with good amounts of rain in June and Jul will help soften the inflation as the rural population are expected to have good incomes.

c. Dollar Strengthening: A stronger dollar against major currencies, the expected Federal Reserves rate hikes in September and the commodities slowing down is a cause of concern for emerging markets.

Monetary Policy Measures

a. Increased Financial inclusion: Introducing more participants and greater healthy competition may help impart pace to financial inclusion by issuing licenses to more and more banks.

b. Improving Management Processes: Policy measures to improve credit appraisal processes of banks and improved governance may bring a decrease in the NPA’s and improve asset quality.

c. By implementing BASEL III reforms at the right time RBI would aim to give provide breathing space to the banks struggling with reduced margins and lower profitability on account of an increase in NPAs.