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Nothwithstanding hopes of a recovery next financial year, profitability of Indian banks, especially public sector ones, would be under pressure due to the high burden of bad loans.
According to the outlook for the banking sector by rating agency India Ratings, an unit of Fitch, impaired asset formation is likely to move closer to peak by FY16, premised on gradual economic revival. However, the asset quality recovery and credit growth pick-up would be sluggish, leading to a very small uptick in profitability. The provision coverage ratio (amounts set aside for bad loans) remains low at 46 per cent for sector in 2013-14 (FY14). It was 49 per cent in FY13.
The slippage ratio (fresh non-performing assets formation) appears to be plateauing and the pipeline of loans going for debt recast has declined recently, it said. Yet, the baggage of incremental provisions for old bad loans will stay high. The rating agency computes the impaired asset book by taking into account gross NPAs, standard restructured loans, and securities receipts issued after sale of NPAs plus bonds given to banks while finalising package for power distribution companies.
For the banking system, the impaired asset book as per cent of loans will be 13 per cent by March 2016. The level is expected to remain flat in FY15 ending March 2015. It was 9.1 per cent in FY14.
India Ratings said the profitability of banks is likely to witness another year of pressure as credit costs remain elevated, with higher write-offs accompanying high delinquency. However, there could be some benefit coming to the bottomline in FY15 from gains and writeback on treasury book.
