ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Commercial Banks: No Substitutes for Risk

ECONOMIC AND POLITICAL WEEKLY Commercial Banks: No Substitutes for Risk The profitability of Indian scheduled commercial banks (SCBs) compares quite favourably with international trends and stayed in the upper tier in 2003, with pre-tax profits, as a per cent of total assets, at 1 per cent. In the same measure, banks in the UK recorded pre-tax profits of 1.2 per cent while in the US they clocked 2 per cent. By cutting costs and shoring up non-interest income, SCBs recorded a strong growth in profits in 2003-04 as well, in spite of the substantial slowdown in income growth due to a softer interest rate regime. As the RBI points out in its latest Report on Trend and Progress of Banking, 2003-04, the source of both income and profits for SCBs during the year was quite different from the previous year. Non-interest income, on an incremental basis, constituted 71 per cent of total income in 2003-04, in contrast to 35.5 per cent in 2002-03. In fact, the creeping shift towards noninterest income has been occurring since the 1990s, as banks try to compete in an increasingly deregulated environment to protect their bottomlines, diversify risk and stabilise income. Even within non-interest income, there has been a bias toward trading income, derived through the sale of investments mostly government securities. For instance, the share of fee-based income, earned through commission, exchange and brokerage, which was 60 per cent of non-interest income in 1997 fell to 33.5 per cent in 2003; conversely, the share of profit from the sale of investments increased from about 4 per cent to 46 per cent during the same time period (EPW, March 2004). Although these shares are by no means fixed, and are liable to change depending on the overall economic environment, the bias towards trading income, which accounted for 49 per cent of the non-interest income of SCBs, does not come without its own risks as events in this year have aptly demonstrated. A marginally tighter monetary stance adopted by the RBI to manage inflation this fiscal, first through a hike in the cash reserve ratio (CRR) and then by an increase in the repo rate has put some northward pressure on interest rates. Both first, and especially second, quarter results of SCBs have been affected as the value of banks

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