Indian banks will grow at a fast clip in the next 3-5 years,but their margins will remain under pressure this fiscal as lenders are unlikely to pass on all funding costs to borrowers in a high interest rate environment,Standard & Poor's said on Wednesday. While that may be OK for the India's high-strung borrowers,it does not translate very well for banks' revenues. * Banks not to pass on all funding costs to borrowers * Credit to grow 20 pct in FY12 * Capitalisation is key for sustained growth There is a fairly high amount of pressure on the funding costs. There is a broad upward movement of the interest rates,which is putting an upward pressure on the funding rates,analyst Geeta Chugh told reporters in a teleconference. Net interest margin - that shows the difference between interest earned and interest paid out - has been a major concern for Indian banks,as the government is left with no choice other than the blunt instrument of more aggressive interest rate increases even as growth momentum slows. Bankers recently sounded cautious while fielding reporters' queries on margin outlook for FY12,with most giving out a conservative outlook of about 3 percent. We are seeing that there is a migration happening from savings deposit to term deposit,Chugh said,citing that as another reason for a hike in funding costs. Chugh,however,is positive about banks' asset quality improving,and sees credit growing 20 percent in FY12,despite a series of interest rate hikes by the central bank,which has raised rates nine times since March 2010. India's economy is growing,the market is fairly under penetrated with private sector credit to GDP (gross domestic product) at just about a little over 50 percent,the demographics for India are fairly favorable and the regulatory framework is prudent,she said. The key sector that will lead the growth in FY12 will be infrastructure,metals and mining,and over a medium term perspective we also see retail lending to provide an impetus to credit growth. CAPITAL CUSHION KEY Chugh said capitalisation is going to be the key for Indian banks,specially state-run ones,going forward. Private sector banks are well capitalised and they do have access to the capital markets. Nevertheless,government-backed banks could need additional capital to support growth plans,she said. Many state-run banks,including Bank of India and Indian Bank have said recently that they will consider raising capital through share sales,as the government's move to raise stake gave them a cushion to safely approach the capital markets. Several Indian lenders have put their plans for domestic debt raisings on the backburner,deterred by surging interest rates. They are waiting for borrowing costs to soften before hitting the market,while some may tap the equity markets instead,banks and analysts said.
