Banks’ asset quality to remain under pressure, says S&P

By: | Updated: March 23, 2016 1:07 AM

The asset quality and capitalisation of India's banking sector is likely to remain under pressure in the next 12 months because of tepid domestic industrial activity...

The asset quality and capitalisation of India’s banking sector is likely to remain under pressure in the next 12 months because of tepid domestic industrial activity, and subdued profitability and high leverage in some corporate sectors, S&P said on Tuesday.

In a report titled Indian Banks Face An Uphill Road This Year, it said that non-performing loan ratios of Indian banks with high exposure to troubled sectors will continue to rise, and credit costs of banks with a backlog of provisions will increase.

Standard & Poor’s credit analyst Amit Pandey said, “These factors could strain the capitalization of banks with below-average profitability, particularly as capital demands are likely to soar as Basel III norms get implemented”.

It expects loan growth in banking sector to be 11%-13% in FY17 and believes that growth in retail loans will continue to outpace that in corporate loans, in line with the trend over the past two years.

“We expect profitability of Indian banks to decline over the next two to three quarters because banks recently cut base lending rates, and their credit costs are likely to remain high,” Pandey said.

He added that credit costs are expected to to remain high because of under-provisioning on their existing gross nonperforming loans, weak corporate performance, continuing slippages of standard restructured loans into the nonperforming category, the central bank’s review of banks’ asset quality, and higher provisioning on strategic debt restructuring loans.

“Indian banks have sizable capital needs to support growth and meet Basel III requirements,” Pandey said, adding that most Indian public sector banks will have to rely on external capital infusion, given their reduced ability to generate internal capital, largely because of the pressure on asset quality in the past few years.

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