Indias sluggish economic growth, rising interest rates and volatile currency are hitting the highly leveraged corporate sector, the report said. We expect continued weakness in infrastructure-related loans, metals and mining, commercial real estate and construction-related sectors. We expect the banking sector's NPL ratio to surge to 4.4% of total loans by March 31, 2015, from 3.4% as of March 31, 2013, due to increased defaults among corporates.
The report assessed the asset qualities of banks in emerging countries such as Brazil, Russia, India, China, Mexico, and Turkey (BRICMT). It said that banks in these countries will require large amounts of capital to support double-digit lending growth and comply with the new Basel-III norms. It said top-tier Indian banks are well placed to achieve Basel-III norms, but smaller banks may have difficulty in complying with them, leading to a consolidation in the industry. Large Indian banks hold sufficient capital with reference to regulatory requirement, though in our opinion, adjusted for risk, this capital is moderate, the report said.
Indian banks return on assets will be below 1% for the next two years due to high credit costs, which will result in a hit on earnings. The report also said the agency is maintaining a negative outlook for Indian banks for the rest of the year. Their standalone credit profiles are higher than the sovereign ratings, but their ratings are constrained by the sovereign ratings as we don't expect these banks to withstand a sovereign-related stress. If we lower the sovereign ratings, we would downgrade the banks as well.