Mumbai: International ratings agency Standard & Poor’s Ratings Services (S&P) on Wednesday said that the revival in private sector investments and credit growth, and a reversal in rising non-performing loan ratios for India’s banks are likely to take more time.
“Any material recovery of corporate loan quality will require improvement in demand in India, deleveraging of corporate balance sheets, and resolution of problems in the infrastructure and metal and mining sectors, all of which will take a while," S&P credit analyst Amit Pandey said.
In a report titled Despite India’s Brighter Economic Prospects, A Banking Revival Is Still A Way Off, published on Wednesday the agency noted that rated private sector banks are better placed than public sector ones to meet Basel III capital requirements.
The recent budget allocates only Indian ₹ 79.4 billion for infusion into banks in the financial year ending 31 March, 2016, the report notes. Public sector banks will therefore have to raise additional capital through additional tier-I hybrid instruments, equity markets, and state-owned Life Insurance Corporation of India, according to S&P.
The ratings agency estimates that credit growth in India’s banking sector will improve to 12%-13% in financial year 2015-16 from less than 10% in the last six months of calendar year 2014.
The government has promised development and good governance, and a lot will depend on its ability to keep its promises and improve the economy, the report notes.
“We expect the profitability of Indian public sector banks to remain weak, and banks’ credit costs to remain elevated," said Pandey.
The report states that this is because of under-provisioning for non-performing loans, slippages from standard restructured loans, and a higher provisioning requirement for fresh restructured loans effective April 2015.
S&P says that prolonged weakness in the asset quality of Indian banks could lead to the assessment that economic risk, which is a key factor in its ‘banking industry country risk assessment’ and ratings on banks, has increased.
“The stand-alone credit profiles and ratings on some public sector Indian banks are sensitive to deterioration in their asset quality and erosion in capital and earnings," the agency said.