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Mumbai, Oct. 14 The prevalent domestic factors are more responsible for the pressures on the Indian banking system rather than global factors, says rating agency Crisil.

Higher funding costs, mark to market requirements on investment portfolios, and asset quality pressures due to a slowing economy will put pressures on the profitability of banks, the findings say.

The banks would also have to contend with declining interest rate spreads, lower fee income due to slowdown in retail lending and lower profit on sale of investments.

The prevailing economic environment, characterised by slower GDP growth, depressed capital market conditions and high interest rate regimes will be some of the challenges, which the Indian banks would face.

On the positive side, Indian banks, with an average Tier I capital adequacy ratio of over 8 per cent, have a lower risk profile. The banks also have limited vulnerability as they have small amounts of global exposure with their international assets around six per cent of their total assets.

The report states that the Indian banking system is relatively insulated from the factors that caused the global financial turmoil. While the problems of global banks arose mainly due to exposure to sub-prime mortgage lending and investments in complex collateralised debt obligations along with a freeze in the inter-bank lending market due to a crisis of confidence, the liquidity crunch facing the Indian markets is qualitatively different, the report says.

The report attributes the liquidity crunch in the Indian markets to the large scale selling by foreign institutional investors, interventions by the RBI in the forex market, continued growth in advances and earlier increases in the CRR to counter inflation.

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