The asset quality of Indian banks is likely to remain weak, or even deteriorate, due to the moderation in economic activity, high inflation, and high interest rates," the report stated.
We expect restructured loans to rise in fiscal years 2012 and 2013. Small and mid-size companies are particularly vulnerable, it added. According to the report, credit growth in India is likely to weaken to 16-17% in 2012 and 2013, from about 23% in 2011. The agency expects net interest margins of Indian banks to remain tight in 2013 due to intensifying competition amid low credit growth, and borrowers' limited ability to absorb higher interest rates.
The report noted that the stand-alone credit profiles of a few Indian banks could weaken due to a decline in asset quality and earnings.
The ratings on government-owned banks, which face greater exposure to asset quality deterioration, could
benefit from a very high likelihood of government support.
Such support underpins the stable outlook on the ratings on Indian banks, said the report. Proposed guidelines of the Reserve Bank of India (RBI) on implementing Basel-III norms in India could strengthen the capitalisation of banks in the country.
We expect all the banks that we rate in India to meet the RBI's Basel- III capital adequacy requirements on time. Post implementation of Basel-III, Indian banks' risk-adjusted capital could move up by at least 100-200 basis points. This could strengthen the credit profiles of domestic banks over the next 3-5 years."
The report pointed out that Indian banks also benefit from the good long-term economic growth prospects of the economy. Over a longer period, the growth in business should enable banks to maintain sound financial health.