BackMoody’s, ICRA see banks hurting from asset quality concerns in medium term
The true level of stressed assets in Indian banks is expected to rise by another 100-150 bps in the near term, according to Moody's and its Indian affiliate, ICRA
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Mumbai: In a joint statement released on Monday, Moody’s Investors Service and its Indian affiliate, ICRA Ltd, said that the peak of the asset quality issues in the Indian banking system is nearly over.
According to the statement, the true level of stressed assets in Indian banks is only expected to rise by another 100-150 basis points (bps).
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 statement said. The Reserve Bank of India’s (RBI) asset quality review (AQR) in October-December 2015 was a particularly important catalyst in pushing banks to recognize some large accounts as being impaired, it added.
Owing to this, the rate of increase in stress has slowed down considerably.
“We expect the pace of deterioration in asset quality over the next 12-18 months should be lower than what was seen over the last five years, and especially compared to FY2016, even as we consider those remaining problem loans which have not been recognized as such in several large accounts," said Alka Anbarasu, vice- president and senior analyst, Moody’s.
Gross non-performing assets of 41 listed banks were at Rs6.7 trillion as on 30 September.
According to Moody’s, such pressure on asset quality largely reflects the system’s legacy problems, as relating to the strong credit growth seen in 2009-2012, when the investment plans of Indian corporates rose significantly.
Given the magnitude of stressed assets in the system, Moody’s expects the banks to increase their focus on resolving some of the large problem accounts. “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.
“Nevertheless, weak reserving levels and continued pressure on profitability will limit the ability of the banks to proactively resolve problem assets under these schemes."
ICRA expects banks to continue seeing a downward pressure on interest rates owing to slowing credit growth.
A muted level of credit off-take—on the back of weak demand, increasing competition and greater disintermediation—will continue to exert downward pressure on lending rates.
“Such a development will be partly offset by the fall in the cost of funds, but stubbornly high operating expense levels and elevated credit costs will continue to dent profitability matrices for the banks," said Karthik Srinivasan, an ICRA senior vice- president.
“And while bank profitability is not expected to be as weak as the levels seen in FY2016, the weakness in asset quality will continue to drag on profitability indicators, with return on equity remaining in the single digits for FY2017 and FY2018," he added.
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