Private sector investment revival, growth in credit and a reversal in the trend of rising non-performing loan ratios for Indian banks would likely take time despite improving operating conditions for banks and more room for the Reserve Bank of India (RBI) to cut rates, said a Standard and Poor’s report on Wednesday.
“We expect the pace of growth of stressed assets to fall because a substantial part of the stress has already been recognised,” said Standard & Poor’s credit analyst Amit Pandey, adding that any material recovery of corporate loan quality would require improvement in demand in India, de-leveraging of corporate balance sheets and resolution of problems in the infrastructure and metal and mining sectors, all of which would take a while.
The report identified capitalisation as a key constraint for some public sector banks (PSBs) in India, stating that due to the budgetary allocation of just Rs7,940 crore for infusion into banks in FY16, PSBs would have to raise additional capital through additional tier-I hybrid instruments, equity markets and state-owned Life Insurance Corporation.
Standard & Poor’s estimates that credit growth in India’s banking sector would improve to 12-13% in FY16 from less than 10% in the second half of CY14.
“Prolonged weakness in asset quality of Indian banks could lead us to assess that economic risk, a key factor in our Banking Industry Country Risk Assessment and ratings on banks, has increased,” the report said, adding that the standalone credit profile and ratings on some public sector Indian banks were sensitive to deterioration in their asset quality and erosion in capital and earnings.