Bank delinquencies set to rise

Written by Sitanshu Swain | Updated: Nov 12 2011, 06:26am hrs
International rating agency Standard & Poor's (S&P), which is keeping a close watch on Indian banks, feels that while the industry is relatively safe, non-performing assets (NPAs) and capitalisation risk-management practices are two areas of concern.

Ritesh Maheshwari, MD, Financial Services Ratings, Asia-Pacific S&P, gives his take on the Indian banking industry in an interview to FE's Sitanshu Swain.

How do you see the Indian banking industry in the backdrop of a global financial crisis, domestic slowdown and rising NPAs

Indian banks benefit from the economy's sound growth, favourable demographics and their own under-penetration. But, we believe, that high inflation, stiff competition and evolving risk-management practices remain key challenges.

Given the prospects of slower growth, we expect delinquencies to rise because high interest rates and inflation and likely lower economic growth in India in fiscal 2012 would hurt marginal borrowers. This will not only increase credit costs, but also also strain the banks overall profitability.

Do you think the Indian banking industrys situation is deteriorating and it may face rating action soon What are the factors that you are monitoring on a day-to-day basis

Despite a slowdown, Indias economic growth remains among the strongest in the world. We don't expect any dramatic impact on our ratings of Indian banks because they already factor in some margin pressure and asset quality deterioration.

We continue to monitor delinquency rates, which, in turn, are correlated with inflation and interest rate. Given the strong (by global standards) credit growth, which is well beyond the internal capital-generation capacity of Indian banks, capitalisation level is a rating weakness for some, and a key factor that we monitor for all Indian banks.

Are you reviewing the ratings of Indian banks

We are reviewing the ratings of Indian banks just as we are doing for 1,000-odd global banks and plan to publish them by mid-December, according to our new criteria.

How do you see the State Bank of India (SBI), which is waiting for capital infusion and grappling with lower tier-I capital and rising NPAs Will you consider a rating revision

SBI's capitalisation is modest when we compare its tier-I capital with the total assets as well as its stock of NPAs. Like other Indian banks, SBI is also experiencing strong (by global standards) credit growth, which is well beyond its internal capital-generation capacity.

Hence, its capitalisation level will continue to decline unless replenished through a capital infusion. Given its importance to Indian economy and a majority government ownership, our ratings on SBI will move in tandem with the sovereign rating, to reflect our expectation of extraordinary government support. We could lower the rating on SBI if India is downgraded, as S&P's doesnt rate Indian banks above the sovereign. Inversely, we could raise the rating if we raise the sovereign rating.

Do you think that the situation in ICICI Bank has now substantially improved and the bank should go for a faster expansion of its balance sheet

Our rating of the ICICI Bank reflects its strong market position in the domestic banking industry, healthy capitalisation, satisfactory funding profile and sound management.A potential of rise in NPL, especially in the slower growth environment, and moderatethough continuously improvingmargin temper its rating strengths.Over the last three years, ICICI Bank has significantly improved its funding profile by increasing the proportion of retail savings and current deposits, which have been the main contributor to its improving interest margin and liquidity situation. ICICI has reoriented its strategy toward profitable growth, after focusing on capital conservation a year back.

Yesterday, S&P revised its BICRA (Banking Industry Country Risk Assessment) on India to group 5 from group 6. It has also revising the economic risk score to 5 from 6, besides assigning an industry risk score of 5. What are implications of this revision

The revision of Indias BICRA to group 5 is essentially a result of change in our BICRA methodology, which we released on November 9. The revision of economic score to 5 is primarily a result of our increased emphasis on economic imbalances, which is low risk for the Indian banking system.

We measure it through an increase in domestic credit to the private sector as a percentage of the GDP (1.48% in the past four years). This limits the risk to the banking system from a sharp increase in real estate asset prices in certain regions. Additionally, we consider India's external position as resilient due to its strong international reserves and relatively low net external debt position. Our criteria defines the BICRA framework as one designed to evaluate and compare global banking systems. A BICRA is scored on a scale of 1 to 10, ranging from the lowest-risk banking systems (group 1) to the highest-risk (group 10). Other countries in group 5 are China, Portugal, Thailand, and Turkey.