There was no further damage to India?s credit rating on Wednesday with Standard & Poor?s (S&P) merely reiterating its earlier stance of there being a one-in-three chance of a sovereign downgrade, but the country?s largest lender State Bank of India (SBI) suffered a slight setback with its stand-alone credit profile lowered a notch to bbb- from bbb. The revision, the ratings agency said, was ?based on our anticipation of a weaker asset quality than we expected?, adding ?SBI?s gross NPL ratio of 5% ? on a standalone basis ? as of June 30, 2012, is the highest among the Indian banks that we rate.? SBI?s credit rating, however, remains unharmed at BBB since the government is expected to continue to support the bank with capital to ensure it maintains the required capital adequacy ratios. The stand-alone credit profiles of HDFC Bank at bbb+ and ICICI Bank at bbb too remain unchanged though Union Bank of India?s stand-alone profile is now lower at ?bb+? from ?bbb-?.
The agency believes the quality of banks? balance sheets will deteriorate with the share of non-performing assets (NPAs) at more than 10% of total loans by March 2013; this compares with a share of 5% in March 2011. It estimates NPAs (including restructured loans) for the banking industry at over R5.8 lakh crore by March 2013 and expects that about 25-50% of the restructured book will slip into the NPL category through the economic cycle.
In April this year, S&P had warned India?s sovereign rating could be downgraded to junk status even as it revised the outlook to negative from stable. Much like it had done then, on Wednesday too, the rating agency raised concerns on the large fiscal and current account deficits and high inflation. However, this time around, the agency, while acknowledging some of the government?s recent initiatives to attract foreign direct investment and bridge the oil subsidy gap, cautioned that with two state elections, including one in Gujarat, coming up, the government has ?only a small window? to implement reforms.
S&P also drew attention to the fact that with a member of the coalition having quit, the ruling alliance was now in a minority in both the upper and lower Houses of the Parliament, a circumstance that could hurt political stability. ?Although the ruling coalition expects support from friendly parties, the political condition tends to become more fluid ahead of the general election expected in 2014,? S&P noted in a report, adding ?the foreign ownership reforms for insurance and pension businesses are likely to become more challenging as they need parliamentary approval.?
S&P expects the Indian economy to grow at just 5.5% in 2012- 2013 given weak domestic and external demand. The agency believes the fiscal deficit for the year will come in at a record 6% of GDP with a slowing economy resulting in weaker-than-expected tax receipts and higher-than-budgeted subsidies. S&P observed that fiscal conditions of several state governments had been adversely affected thanks to the worsening financials of power companies.
