Bank credit growth to be muted, says S&P

Revival in private sector investments and credit growth, and a reversal in the trend of rising non-performing loan ratios for India's banks is likely to take time, according to Standard & Poor’s Ratings Services.

This is despite improving operating conditions for banks because of a reform-minded government and an increased elbow room for the central bank to lower interest rates, the global rating agency added.

"We expect the pace of growth of stressed assets to fall because a substantial part of the stress has already been recognised," said Standard & Poor's credit analyst Amit Pandey.

Loan quality

He observed that 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.

In a report titled "Despite India's Brighter Economic Prospects, A Banking Revival Is Still A Way Off," Pandey said capitalisation is a key constraint for some public sector banks in India.

The report noted that rated private sector banks are better placed than their public sector peers to meet Basel III capital requirements.

The recent budget allocated only Indian Rs 7,940 crore for infusion into banks in fiscal 2016 (year ending March 31, 2016).

Public sector banks will therefore have to raise additional capital through additional Tier 1 hybrid instruments, equity markets, and state-owned Life Insurance Corp.

Credit growth

Standard & Poor's estimates that credit growth in India's banking sector will improve to 12 per cent - 13 per cent in fiscal 2016 (year ending March 31, 2016) from less than 10 per cent in the second half of calendar year 2014.

The current 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.

That's because of underprovisioning for non-performing loans, slippages from standard restructured loans, and a higher provisioning requirement for fresh restructured loans effective April 2015.

Prolonged weakness in asset quality of Indian banks could lead S&P to assess that economic risk, a key factor in its Banking Industry Country Risk Assessment and ratings on banks, has increased.

The rating agency said standalone credit profiles and ratings on some public sector Indian banks are sensitive to deterioration in their asset quality and erosion in capital and earnings.