Though banks in general have benefited from the lower YTM announced by the Reserve Bank of India in April the public sector banks have benefited disproportionately. In SBI's case the write back of appreciation in securities portfolio has camouflaged what otherwise was a very mediocre set of results.

While in the case of Bank of Baroda the write back has highlighted what was a greatly improved performance. BoB in particular has shown some real qualitative improvements in earnings and in the balance sheet.

But despiteimproved results all around by the banking sector, (i.e growth in PAT, operating profits, advances etc) the fact that the country's largest bank has struggled, barely showing growth in gross profits (three per cent) and relying heavily on its revalued investment portfolio for its profit has created new worries in market circles. One, for the current year it is certain that there will be an upward revision of interest rates. This means that the YTM for the current year will be higher than the 12 per cent announced for 1997-98, and the depreciation in the value of approved securities will have to be factored in the income statement, bringing down net income in exactly the opposite manner to what happened in the last year.

But this need not be a negative factor. If the cut-off YTM is higher it will be because interest rates will also have been higher during the year. By virtue of higher interest rates the lower interest spreads that had hit most banks during 1997-98 will improve. So if banks have to take a hitdue to depreciation in the value of their securities they will more than make it up by higher interest income.

The second worry is over non performing assets. With credit quality (including credit given through non-SLR instruments) to the corporate sector becoming more uncertain, banks run the risk of higher NPAs. While this is true, the large PSU banks such as SBI and BoB have shown in the last one year that attempts at credit management as well as genuine recovery attempts can bring down NPAs (at least as a proportion to assets if not at an absolute level).

Further, most banks have managed to shore up their capital adequacy through both tier I & II capital. But this is not to say that the picture is rosy for the banks, in fact the current year could be the worst yet but the PSU banks have been focussing on non-funds based businesses apart from traditional lending and have been shoring up fee-based income.

Further, the loss of the ECB market may see the FIs benefiting more than the banks and companiesmay opt more for liquidity and receivables management and further cost cutting, rather than use bank finance for further growth.

The PSU bank's top management have without exception mentioned banks participation in the equity markets. This could possibly lead to two things.

One, an outlet to the government disinvestment programme whereby the banks could end up with some reasonably priced assets (since the disinvestment programme will commence in the better PSUs). And two, banks with their massive liquidity could pick up some real bargains in the current depressed equity markets, either directly or through a specialist fund manager such as the Unit Trust of India.

The stock markets have feared the worst for the banking sector and the results for the last year have not offered much cheer. Since November last year the bank stocks have been falling in line with the market, and only recently some have started underperforming, and bank stocks in general have hit new 52-week lows. SBI found some support verybriefly after the results but collapsed soon afterwards once realisation set in about the nature and quality of the jump in net income.