Asset quality issues continue to hit banks: Rating bodies

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Mumbai | Published: January 10, 2017 6:21:40 AM

Credit rating agency Moody’s and its Indian arm ICRA on Monday said asset quality issues will continue to hurt prospects of Indian banks in the medium term, despite continued deterioration of the asset quality having been arrested by most of the lenders.

Weak asset quality will continue to plague credit profile of banks, with their profitability remaining under pressure till the next fiscal, says a report. (Reuters)According to Moody’s, the pressure on the asset quality is largely reflective of the banking system’s legacy issues, particularly those relating to the strong credit growth seen between 2009 and 2012, when a lot of Indian corporates’ investment plans rose significantly. (Reuters)

Credit rating agency Moody’s and its Indian arm ICRA on Monday said asset quality issues will continue to hurt prospects of Indian banks in the medium term, despite continued deterioration of the asset quality having been arrested by most of the lenders.

According to Moody’s, the pressure on the asset quality is largely reflective of the banking system’s legacy issues, particularly those relating to the strong credit growth seen between 2009 and 2012, when a lot of Indian corporates’ investment plans rose significantly.

“Nevertheless, aside from these legacy issues, the underlying asset trend for Indian banks will be stable because of a generally supportive operating environment. While corporate balance sheets stay weak, a further deterioration in key credit metrics, such as debt/equity and interest coverage ratios, has been arrested,” the rating agency said.

In fact, Alka Anbarasu, vice president and senior analyst at Moody’s, said even if we consider the remaining problematic loans that are yet to be identified across several large accounts, the pace of deterioration in the asset quality over the next 12-18 months is still expected to be lower than what we witnessed over the last five years, and particularly in FY16. However, the damage done by the already problematic accounts will require some action to rectify. “In this regard, we expect an increased pace of debt restructuring under the various schemes offered by the RBI, including the scheme for the sustainable structuring of stressed assets (S4A), strategic debt restructuring (SDR) and the 5:25 scheme,” said Anbarasu.

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ICRA said weak demand for credit, increasing competition and greater dis-intermediation will continue to exert downward pressure on lending rates. Senior vice-president Kartik Srinivasan said even though such a development would be partly offset by the fall in the cost of funds, stubbornly high operating expense levels and elevated credit costs will continue to hurt profitability metrics for banks.

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