Indian banking sector's growth to remain high: S&P

Despite intense competition and high inflationary pressures, India's banking sector will continue to show high growth owing to the country's strong economic expansion, credit rating agency Standard & Poor's (S&P) said today.

"Growth in India's banking sector will remain high, bolstered by sound economic growth prospects... We expect credit growth of about 20 per cent in the next fiscal year," S&P said.

The growth in banking would happen despite high domestic inflation and intense competition in the sector, it added.

The ratings agency said that India's banking sector had weathered the global financial slowdown on the back of a robust economy, a stable retail deposit base and a prudent regulatory environment.

However, S&P said that the asset quality of the Indian banking sector came under some pressure in the fiscal year ended March 31, 2010.

"The gross non-performing loans (NPLs) for our portfolio of rated Indian banks increased to 2.5 per cent as of March 31, 2010, from 2.2 per cent a year ago. This was in line with our expectations," the ratings agency said.

It added, however, that the increase in NPLs was contained by the quick economic recovery, modest leverage and low sectoral concentration in the banks' loan books. Besides this, the banks had low exposure to sensitive sectors.

The NLPs were also reined in because of the one-time dispensation by the Reserve Bank to restructure loans without classifying them as NPLs (on meeting certain criteria), it added.

"Slippages (loans moving to NPL) from restructured loans were 5-20 per cent in the six months following the completion of the restructuring exercise in June 2009," S&P said.

However, looking ahead, it forecast: "We expect 25-50 per cent of the restructured loans to slip to NPL in the next two years."

The ratings agency said that it expects credit growth to continue to exceed nominal GDP for the next five years.

S&P said that going forward, the impetus for overall credit growth is expected on account of "India's low credit penetration, large-scale infrastructure investments, companies reconsidering large acquisitions, and revived demand for working capital and capital expenditure".

It said that secured retail credit will also pick up moderately due to an increase in auto and housing sales, attractive interest rates, and improved job security.