India Ratings sees banks stable in 2013

Other positives which will work for the banking sector include a likely stabilisation on asset quality concerns by mid-2013, Bhoumik said.

The report from India Ratings, formerly Fitch Ratings, comes within a day of its international peer Moody's and S&P giving the domestic banking sector a "negative" outlook.

The gross NPAs (Non-Performing Assets) for the system will peak at the 4-4.2 per cent levels by June and will either stabilise or fall then afterwards, Bhoumik said, adding liquidity and funding will dominate the discourse this year.

However, he said, one should not expect a dramatic improvement on the NPA front and it will be a while before the gross NPAs reach the pre-2008 crisis levels of under 3 per cent.

Another positive which will work for the sector is the overall compliance to the stricter Basel-III capital regulations and the government's commitment to fund around USD 45 billion needed over the next five years, he said.

The government, which will have to bear around 43 per cent of the total capital infusion at the current shareholding levels of over 51 per cent, will have to plan its infusions meticulously to avoid large demand towards the latter part of the period, he cautioned.

The Basel-III guidelines are positive from the rating perspective, but providing additional capital will hurt investors' interests as the return on equity will go down, hence making a case for the consolidation of small and weaker banks with the bigger ones, he said.

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