Banks' asset quality, earnings to remain under pressure: S&P

Standard & Poor's today said that slower economic growth, high inflation and high interest rates are likely to impact the asset quality and earnings of Indian banks in financial year 2012-13. This could pose a ratings risk to Indian banks going forward.

S&P currently rates 10 Indian banks including 7 public sector banks. All carry the issuer credit rating of 'BBB-' with 'stable' outlook. 

"The non-performing loans (NPLs) could be upwards of 3% by March 2013 from around 2.9% in March 2012 and 2.4% in March 2011," said Geeta Chugh, credit analyst at S&P. However, industry wide restructuring of loans and state-owned banks' improved monitoring and recoveries could help in limiting the rise in NPLs, she added.

The corporate debt restructuring (CDR) cell, that helps revive large debt ridden companies, witnessed sharp rise in the number of cases in the financial year 2011-12. At the end of December 2011, the number of cases were at 364 amounting to Rs 1.83 lakh crore, up from 305 cases worth Rs 1.38 lakh crore at the end of financial year 2010-11.

Chugh said that the restructured loans are expected to increase to around 4% of total advances at the end of current financial year from 2.6% a year ago. In financial year 2012-12, restructured loans are expected to be in the range of 4-5% of total advances.

Currently, loans from road, telecom, iron and steel and textiles projects have come up for restructuring. Going forward, bank loans to airlines, state electricity utilities, construction and real estate sectors are also likely to get restructured.

In 2012-13, the net interest margins of banks are likely to stay tight owing to fall in credit growth and inability to pass on the costs to customers amidst high competition. "Moreover, the borrowers' ability to absorb higher interest rates is limited," said Chugh. However, income from bond trading is likely to increase as interest rates soften which will help moderate the impact of lower margins and higher credit costs. S&P expects the return on assets of Indian banks to remain less than 1% in financial year 2012-13.

Bank credit growth is expected to be in the range of 16-17% in the financial years 2011-12 and 2012-13 on account of a slowing economy and high interest rates. S&P has lowered India's GDP growth forecast to 6.8% in current financial year and 6.5 per cent in the next financial year.