Indian banks are likely to face significant headwinds in the fiscal year beginning April 1, 2012, said a Standard & Poor’s report.

Banks' asset quality and earnings are likely to remain weak, the report added.

The international credit rating agency assessed that the economy’s slower growth, a dip in credit growth, rising delinquencies, and tighter margins could dent the banking sector’s operating performance.

The stand-alone credit profiles (SACPs) of some Indian banks could deteriorate somewhat though the overall ratings outlook for the banking sector is stable.

The agency cautioned that the asset quality of Indian banks could deteriorate further and weaken the credit profile of the industry if the economy slows significantly or if inflation or interest rates rise unexpectedly. Further, it expects credit costs of banks to be high in the next few years.

Credit growth, asset quality

Credit growth in India will decline 16-17 per cent in the fiscal years ending March 31, 2012 and 2013, from about 23 per cent in fiscal year 2011.

A slowdown in the economy, high domestic interest rates, and inflation are likely to reduce credit growth. Further, asset quality of banks is likely to remain weak due to these factors, S&P said in the report titled ‘India Banking Outlook: Economic Headwinds Are Likely To Lower Asset Quality And Earnings In 2012’.

“We expect restructured loans to rise in fiscal years 2012 and 2013. Small and mid-size companies are particularly vulnerable," said S&P credit analyst, Ms Geeta Chugh.

Stress and restructuring

Stress is mounting on some highly leveraged large companies. In this regard, the agency referred to the fact that the corporate debt restructuring (CDR) cell — which helps revive large debt-ridden companies that have loans from many banks — has seen a sharp rise in new cases in 2012.

The total number of debt restructuring cases received by the CDR cell increased from 305 (debt aggregating Rs 1,38,600 crore) as on March-end 2011 to 364 (debt aggregating Rs 1,83,480 crore).

A large number of road, telecom, iron and steel, and textiles projects have come up for restructuring.

Bank loans to large airlines and state electricity utilities also face the risk of default, though these are currently not under CDR restructuring. S&P also expects some stress in the high-risk construction and real estate sector.

Margins to remain tight

S&P said the net interest margins of Indian banks will remain tight in fiscal 2013 because banks are unable to pass on the entire increase in funding costs to customers. This is because competition is intensifying and credit growth is low. Moreover, borrowers’ ability to absorb higher interest rates is limited.

The central bank’s liberalisation of interest rates on savings bank deposits has had only a negligible impact on bank margins. However, if any large bank increases interest rates on savings deposits, the agency warned that the move could change the competitive landscape and potentially have a more pronounced impact on margins.

(This article was published on March 13, 2012)
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