Tepid economic growth hits recovery prospects for Indian banks: S&P

Debt recast pipeline to stay high for two years

The economic slowdown for the third year in a row has already hit the financial health of Indian banks. To add to their misery, the bulging stress loan kitty and drag on earnings growth has made chances of recovery bleak, according to Standard and Poor’s.

“Deteriorating asset quality and earnings are likely to constrain the credit profiles of Indian banks over the next two years,” said Standard & Poor’s credit analyst, Geeta Chugh. The rating agency does not see even a mild recovery for the Indian corporate sector in the current financial year. The slower-than-expected gross domestic product (GDP) growth, heightened currency volatility, and high interest rates have hit balance sheets.

The banking sector’s non-performing loan (NPL) ratio could surge to 3.9 per cent of total loans by March 31, 2014 and to 4.4 per cent in March 2015.

The ratio was 3.4 per cent in FY 2013, S&P said in statement.

Indian banks have restructured 5.7 per cent of their aggregate loan balances as of March 31.

The Reserve Bank of India allows banks to exclude these loans from their reported NPLs until FY 2015.

S&P on Wednesday released a report titled “Slack economic growth dents recovery prospects for Indian banks.” We base our view on slow economic growth that is constraining the corporate sector, the chief recipient of banking credit, the report said.

“We expect restructuring to remain high in the next two years because of the weak economy and the regulatory allowance,” it pointed out.

Standard & Poor’s has revised its forecast for India’s GDP growth to 5.5 per cent for FY 2014 from six per cent. “The corporate sector’s weak performance, combined with high interest rates and a weak rupee, is likely to weaken debt servicing for these companies,” said S&P credit analyst Mehul Sukkawala.

“We believe the infrastructure (power and road), metals and mining, construction, and capital goods sectors are particularly at risk.”