S&P keeps ratings of Indian financial institutions unchanged at BBB-

Mumbai: S&P global ratings on Thursday said it has kept ratings for all financial institutions in India unchanged at investment grade (BBB-) despite increased structural and cyclical challenges that Indian companies face.

“Our ratings on all financial institutions in India remain unchanged because we consider that all these entities remain capitalized in line with their existing stand-alone credit profiles and the ratings,” the rating agency said in a statement.

S&P said the credit quality of Indian companies had deteriorated sharply in the past few years amid tepid domestic industrial activity, weak commodity prices, project execution woes, subdued profitability and high leverage in some pockets. Particularly, the metal sector and infrastructure sector had 34.4% and 16.7% stressed loans, respectively, as on 31 March, the agency said.

“The Indian iron and steel industry suffers from low capacity utilization, weak demand and prices, competition from exports given the global steel glut, and high leverage. We believe a reduction in leverage will require further improvement in demand, capacity utilization, and continuous pricing power,” the statement said.

S&P projects gross domestic product (GDP) per capita to remain low at $1,703 for the financial year 2017, though improvements in policy-making will continue to boost the medium-term prospects for the country’s economic and fiscal performance. 

“India’s credit risk remains very high, with weak foreclosure laws accentuating challenges despite moderate private sector debt,” it added. 

The rating agency believes that efficient banks with higher profitability, capitalization, and a focus on digital banking will gain market share over others, whereas competition from niche banks will be limited in the near term, given the gestation period involved in creating a franchise and the limited scope of operations and profitability of these banks.

“While improvements in policy making have raised prospects for a stronger economic and fiscal performance, a material improvement in asset quality will require a further pickup in industrial demand, deleveraging of corporate balance sheets, resolution of problems in stressed sectors, and further pass-through of lower interest rates to borrower. We expect risk from economic imbalances to be low in the next 12 months,” the statement said. 

“Demonetization, while a long-term positive, will have a transitory impact on growth in the short term and could hurt asset quality... bank deposits would benefit due to demonetization, though not all inflows will remain in the banking system on a permanent basis,” it added.