India Ratings keeps stable outlook for Indian Banks
Asset quality pressures to ease funding challenges remain
Maintaining stable outlook on Indian Banking sector, Indian Ratings today said the pressures on asset quality are expected to subside from the second half 2013-14.
Easing of burden from accumulation of bad loans and provisions for it may indeed be music to ears of bank chiefs, especially of public sector banks.
The gross Non-performing assets rose sharply from just over 2 per cent in 2007-08 to 4 per cent (estimated for March 2013) may begin to ease from June, according to India ratings.
Senior director Ananda Bhaumik said there may not be dramatic reduction in Non-performing assets.
A stable outlook for has been maintained on expectation of continued equity injection in line with Basel III requirement, and cyclical improvement in asset quality.
But still they may have to face burden of restructured loans. The tide of loans coming for recast is unlikely to subside especially from infrastructure projects.
First, it was corporate loans, facing stress due to economic downturn which made it for debt recast. There may be some relief on this front as the slippage from restructured loans is expected to moderate in the future.
Now, increasingly the share of the infrastructure projects going in for debt recast is grow over period.
Rating agency said the continuing challenges in project execution by infrastructure companies may result in increased restructuring of infrastructure loans. This is due to challenges in coal linkage and land acquisition.
The some public sector banks will see a major challenge to their asset liability management with slow growth in deposits and long term assets funded by short term deposits.
In India Ratings’ opinion, the growing short-term funding mismatches that increase refinancing pressures may keep deposit costs elevated.
Asset-liability mismatches up to one year have been rising and for some banks are at all-time highs. The refinancing risk is partly mitigated by government banks’ strong domestic depositor base. The high pace of refinancing squeezes quarter-end liquidity and may delay the transmission of any policy rate cut to borrowers.
This is because banks may find it difficult to make matching reductions in deposit rates.
Banks have been addressing the problem by pushing long-term deposits. The government may facilitate the raising of long-term ‘infrastructure bonds’ from debt capital markets helping banks mitigate liquidity pressures, it said.