Mumbai: The growth in stressed assets of Indian banks, a major worry for policymakers, might ease in the coming months but the recovery of banks will be gradual since the investment cycle will take time to revive, global rating agency Standard and Poor’s (S&P) said on Tuesday.

“We anticipate that the growth in stressed assets will recede in the next two to four quarters," said S&P’s credit analyst Amit Pandey. “Any material improvement in asset quality will lag economic recovery, corporate deleveraging, decisive steps to alleviate problem of stressed sectors, and some respite on interest rates."

Also, profitability of most public sector banks will remain modest in fiscal 2015 because of under-provisioned loan books and sizable outstanding standard restructured loans, Pandey said.

Total bad loans of India’s 40 listed banks stood at about 2.42 trillion in the March quarter—a growth of 36% from the year-ago period.

On the other hand, the amount of loans restructured under the corporate-debt restructuring route, under which banks relax the repayment terms for stressed borrowers, stood at 3.3 trillion till March on a cumulative basis.

Noting that Indian banks have sizable capital needs to support growth and meet Basel III requirements, S&P said the low capitalization of some rated public sector banks is likely to constrain growth of Indian banks.

“However, the increase in equity valuations for banks following the recent stock market rally will help some of these banks to raise equity and meet near-term capital requirements," the agency said.

Total capital requirement of state-run banks to meet Basel III norms between now and March 2019 is estimated at about 4.15 trillion. Of this about 90,000 crore should come from the government if it wants to maintain its current holding in public sector banks.

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