Woes for Indians banks to continue in FY17: S&P

Asset Quality, capitalisation to stay under pressure

Global rating agency Standard and Poor's today said Indian banking sector might continue to face tough times over next 12 months as their asset quality and capitalisation remain under pressure.

The asset quality and capitalization of India's banking sector is likely to remain under pressure in due to tepid domestic industrial activity, and subdued profitability and high leverage in some corporate sectors, S&P said in statement.

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The stand-alone credit profiles and ratings on some public sector banks could get lowered, given their weakening asset quality and capitalisation.

The non-performing loan ratios of Indian banks with high exposure to troubled sectors will continue to rise. The credit costs with a backlog of provisions will increase, said Amit Pandey, credit analyst with Standard & Poor's.

These factors could strain the capitalization of banks with below-average profitability, particularly as capital demands are likely to soar as Basel-III norms get implemented. Rating agency released report titled "Indian Banks Face An Uphill Road This Year".

S&P expects loan growth in India's banking sector to be 11-13% in fiscal 2017 (year beginning April 1, 2016). The growth in retail loans will continue to outpace that in corporate loans, in line with the trend over the past two years.

The profitability of Indian banks to decline over the next two to three quarters on recent cut in base lending rates, and their credit costs are likely to remain high.

The credit costs will remain high for number of reasons including under-provisioning on their existing gross nonperforming loans, weak corporate performance, continuing slippages of standard restructured loans into the nonperforming category. Reserve Bank of India's review of banks' asset quality, and higher provisioning on strategic debt restructuring loans will also push credit costs high.

Indian banks have sizable capital needs to support growth and meet Basel III requirements. The private sector banks that S&P tracks are better placed than their public sector peers on this front.

Most Indian public sector banks will have to rely on external capital infusion, given their reduced ability to generate internal capital. The internal capital generation capacity has been hit largely by the pressure on asset quality in the past few years, S&P added.