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

Standard & Poor's (S&P) on Tuesday said slower economic growth and high inflation and interest rates were likely to hit the asset quality and earnings of Indian banks in 2012-13. This could pose a risk of rating downgrade for the banks.

S&P rates 10 Indian banks, including seven public sector ones. All the banks have an issuer credit rating of 'BBB-', with a 'stable' outlook.

S&P credit analyst Geeta Chugh said, "Non-performing loans (NPLs) could be above three per cent by March 2013, compared with about 2.9 per cent in March 2012 and 2.4 per cent in March 2011." However, the restructuring of loans across the industry and improved monitoring and recoveries by state-owned banks may help limit the rise in NPLs, she added.

The corporate debt restructuring (CDR) cell recorded a sharp rise in the number of cases referred to the forum in 2011-12. At the end of December, the number of cases referred was 364 (worth Rs 1.83 lakh crore). This compares with 305 cases worth Rs 1.38 lakh crore at the end of 2010-11.

Chugh said restructured loans were expected to rise to about four per cent of total advances at the end of the current financial year, compared with 2.6 per cent a year earlier. In 2012-13, restructured loans are expected to stand at four-five per cent of total advances.

A number of loans from road, telecom, iron & steel and textiles projects have recently been referred for restructuring. Bank loans to airlines, state electricity utility companies and construction & real estate sectors are also likely to be restructured.

In 2012-13, net interest margins of banks are likely to remain tight, due to a fall in credit growth, the inability to pass the costs to customers and high competition. "More, the borrowers' ability to absorb higher interest rates is limited," said Chugh. However, as interest rates soften, income from bond trading is likely to rise, and this would help moderate the impact of lower margins and higher credit costs. S&P expects returns on assets of Indian banks to remain less than one per cent in 2012-13.

Banks' credit growth is expected to be 16-17 per cent in 2011-12 and 2012-13, owing to the slowing economy and high interest rates.

S&P has lowered the forecast for growth in India's gross domestic product to 6.8 per cent in the current financial year and 6.5 per cent in the next.