Rising interest rates to hurt bank profitability: RBI

The hike in savings account interest rate,amortisations of pension liabilities and potentially enhanced provisioning requirements for NPAs may also impact profitability,it said.

The report noted that banks profitability improved,buoyed by increased net interest income though non-interest income remained stagnant.

An increase in net interest income (NII) facilitated growth of around 20 per cent in aggregate net profit of the banking system,even with an almost stagnant non-interest income and increase in risk provisions,it said.

Interest income increased by 18.6 per cent over 7.5 per cent last year and interest expense increased by 10.1 per cent as against 4.0 per cent last year,it said.

There was improvement of 34.9 per cent in the NII of the banks during 2010-11 despite little change in non-interest income,increase of 49 per cent in risk provisions and 24 per cent increase in operating expenses.

The growth in interest income by 18.6 per cent was,however,not in tandem with the growth in loans and advances which grew by 22.6 per cent during 2010-11,it said.

However,it said,the public sector banks registered a lower growth in profits mainly due to reduction in trading profits,increase in provisions towards staff expenses (including those for pension liabilities) and towards impaired assets.

Under stress conditions based on NPA shocks,it said,the profitability of the banks was seen to be affected significantly though the capital adequacy position appeared to be reasonably resilient.

The study indicates that some banks may face extreme liquidity constraints,under severe stress scenario. Overall,the results of the macro-stress tests using different scenarios,suggested that the banking sector would be able to withstand macroeconomic shocks though the prevailing inflation and interest rate situation is expected to have an adverse effect on the asset quality of banks,it said.