Banking sector is one of the most important sector that helps our economy to improve by providing loan, collecting scattered deposits from the society. Also we know that this sector earn huge profit every year. But for last few years individual bank profit decreases for various reasons. Here I attached an article regarding the reasons of reducing profit and impact on economy written by a banker.
Slump in bank profits impacts economy
Published: Saturday, 25 May 2013 (Financial Express)
The net profit of banks has dipped in 2012 compared with that of 2011. The operating profit for the first quarter of 2013 is rather worse than previous two years. The trend of the banking sector is alarming for the banking sector itself as well as the economy.
Last year, bank-profit slumped for various reasons. The cost of fund was higher than the previous year as liquidity crisis was acute in 2012 and most of the banks tried to meet their liquidity crisis and AD ratio. The average rate of deposit was 11 to 12.50 per cent which increased the cost of fund and at the same time the lending rate was lower. In addition to booking more deposits, the banks slowed down their investment to maintain the AD ratio which also hit their profitability. The share market investment rule also cut down investment by banks in stocks. It is one of the main reasons for decreasing profit although top leaders of banks do not agree with this. The new loan classification and provisioning system also reduced the net profit though the provisioning system will increase the strengths of the banks. But the downward trend of profit in the first quarter of 2013 does not have any relation with the provisioning system.
Banks play a very dynamic role in the economic development of a nation through mobilization of savings and lending money to productive sectors. In addition to encouraging the young entrepreneurs, banks play an important role in financing for development projects, poverty alleviation, infrastructure, agriculture, industrial term loan, working capital and foreign trade. Unfortunately, profit of banking sector is dipping and the investors are very much worried about their investment.
If the trend continues, banks will be less forthcoming in investments. They will not sanction loans if they are not fully confident of the recovery. If investment by banks shrinks as apprehended, growth in most spheres of the economy will be slower and all relevant sectors will be affected. It can be said that the productive sectors including agriculture, industry, infrastructure, real estate, shipping etc., will be seriously harmed due to inadequate funds. In addition, the banks may go for mergers and acquisitions that may warrant significant job cuts.
Therefore, banks should be aware of their profitability and at the same time ensure that they have prospective sectors for investment where cost of fund should be low. If the cost of fund is low, then the investors will get more profit on their investments. In doing so, they should appraise each and every project cautiously and mitigate the risks of the investment that will keep the NPL (Non Performing Loan) low, which in turn will help them avail the benefit of the provisioning system and ultimately profitability may not be remote at all. Apart from this, credit risk grading system must be well managed which promotes bank safety by facilitating informed decision making. This will help the banks to acquire more profits and in the process help the economy.
The writer is a banker. email@example.com