Recovery in profitability to elude Indian banks in FY16: CRISIL

Continued pressure on interest margins and provisioning costs are the reasons

The profitability of the Indian banking system will remain subdued, with return on assets expected to stay below one per cent in 2015-16, owing to the continued pressure on interest margins and provisioning costs.

Given the weakening in asset quality and continued pressure on profitability, capital position of Indian banks has moderated in 2014-15. These pressures will persist even in the current financial year (FY16), according to rating agency CRISIL.

It said banks, mostly public sector banks, would need to step up their capital-raising efforts (both equity and non-equity Tier-I) to support credit growth and meet Basel-III capital norms.

According to Crisil, improvement in performance is expected only in the latter half of the year. Growth in advances is likely to pick up only marginally in FY16 from an estimated 11 per cent in FY15, as the private sector’s spending capital expenditure remains low over the medium term.

Crisil said the interplay of several factors would determine the asset quality. The improvement in macroeconomic environment and pickup in industrial and infrastructure activity would help reduce stress on asset quality in 2015-16.

Regulatory initiatives, such as allowing banks to lend longer-term loans to existing and new projects in core industries like 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, 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.

Gross non-performing assets, estimated at 4.4 per cent as on March 31, are not likely to improve materially in 2015-16.