Banks continue to face pressure on profitability, loans: Crisil

Pressure on asset quality and profitability of Indian banks will persist well into 2015-16 as improvement in performance is expected only in the latter half of the year, as per Crisil.

“Growth in advances is likely to pick up only marginally in 2015-16 from an estimated 11 per cent in 2014-15 given the expectation of low level of capital expenditure by the private sector over the medium term. The interplay of several factors will determine the asset quality of banks,” the rating agency said in a report.

The gross non-performing assets (NPAs) and the overall weak assets, estimated at 4.4 per cent and 6.0 per cent, respectively, by March 31, 2015, are not likely to improve materially in 2015-16.

It added that the improvement in macroeconomic environment and pickup in industrial and infrastructure activity will help reduce stress on asset quality in 2015-16.

Furthermore, regulatory initiatives such as allowing banks to lend longer-term loans to existing and new projects in core industries such as infrastructure, with periodic refinancing, are expected to reduce pressure on borrowers’ cash flows in these industries.

However, the withdrawal of regulatory forbearance on standard loans restructuring from April 1, 2015, could result in higher slippages in the near term. Also, the performance of the existing stock of restructured standard assets as they come out of their moratorium period on repayment will remain a key factor influencing asset quality in 2015-16, it said.

India Inc outlook

India Inc’s credit quality will continue on a slow recovery path in 2015-16. Although the credit ratio shows an upward trend and is likely to remain over 1 time over the medium term, the return to strength for systemic credit quality is a long way away.

“Crisil believes that the improvement in credit quality will be gradual and restricted to firms with low leverage and healthy profitability in the near term. Though policy rate cuts are yet to transmit to lower lending rates, profitability of Indian corporates may improve in 2015-16 on the back of improvement in private consumption, favourable commodity prices, and a mild upswing in domestic investments. However, Indian exports remain exposed to demand slowdown from the Eurozone,” the report said.

A significant improvement in investment demand and a sustained push for reforms by the central government are imperative for a sustainable improvement in systemic credit quality. The deleveraging of balance sheets by indebted firms, inflation, and the impact of monsoon remain key monitorables during 2015-16, the report added.

There is “significant improvement” in the credit quality of mid-sized firms with operating revenues of between Rs.100 to Rs.500 crore.

"The credit ratio, or the ratio of upgrades to downgrades, was at 2.26 for the six months ended 31 March, compared with 1.55 for small firms (operating revenues under Rs.100 crore) and 2 times for large firms (operating revenues above Rs.500 crore), Crisil said.

“Mid-sized firms look better placed – many of them have improved business profiles and maintained profitability. They managed working capital better than smaller firms because of greater bargaining power,” said Pawan Agrawal, chief analytical officer at Crisil.

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