A majority of bankers feel that the profitability of banks can take a hit this financial year, or at best remain where it is, because of falling treasury income and treasury profits.

Over 60 per cent of the chairmen of banks present at the annual general meeting of the Indian Banks' Association polled by Business Standard on Saturday felt that profits would take a hit on account of losses in their investment portfolio, while another 20 per cent felt profits would be stable or even fall.

Business Standard polled 20 chairmen and executive directors of state-owned banks, private banks and foreign banks.

Less than 25 per cent of the bankers polled felt that profits would rise in 2004-05. Those subscribing to this view said net profits could rise by 15-20 per cent, largely because of a 15-16 per cent increase in credit offtake this financial year.

Almost all the chairman said credit had picked up strongly in this financial year. Around 20 per cent felt that interest rates would harden by 25-50 basis points. A couple of chairmen felt that yields could fall further by 25 basis points in the next two months.

While the executives felt that their portfolios of government securities would not take a major hit, saying "our meeting with the Reserve Bank of India governor on Thursday did the trick", this view was not shared by the heads of medium and smaller banks.

There could be depreciation in some banks' investment portfolios, depending upon the extent of investment fluctuation reserves they had already built up and the average duration of their securities portfolio.

Bank of Baroda Chairman P S Shenoy said the bank's tolerance level was 7 per cent. This means that even if yields on the benchmark 10-year paper rise to 7 per cent, there will be no depreciation.

Punjab National Bank Chairman S S Kohli said, "I am comfortable even if interest rates go up by another 150 basis points, without having to touch my investment fluctuation reserves."

Addressing bankers at the IBA annual general meeting, Finance Minister P Chidambaram said though the statutory liquidity ratio was capped at 25 per cent of net demand and time liabilities, banks' investments in government securities was far higher at 46 per cent.

The increase in profitability for the past few years had come largely from treasury operations, which accounted for 50 per cent of banks' profitability in 2003-2004, Chidambaram said.

The 51 per cent credit-deposit ratio of the banking system further reflected the reluctance of banks to lend to industry, Chidambaram pointed out.

On the critical issue of consolidation in the banking sector, over 90 per cent of the chairmen said they were optimistic on mergers and acquisitions in the sector.

"If there is synergy and value creation, we do not mind taking over weak banks since this will help the system," said Shenoy.

"Consolidation is inevitable, as banks can reap the benefits of economies of size. Indian banks do not feature high in the list of large global banks," said Union Bank of India Chairman V Leeladhar.