The recovery of the country’s banking sector will time a long time because of the stress in the domestic corporate and non-banking finance sectors, global rating agency Standard and Poor’s said on Tuesday.
“Fragile financial markets, rising risk aversion, and weakness in some highly leveraged corporate sectors will continue to stress Indian banks’ asset quality and growth,” said S&P Global Ratings credit analyst Geeta Chugh.
Liquidity has tightened and funding costs have gone up.
“We expect the smaller fincos to increasingly have to resort to an ‘originate and sell’ business model to optimise their large distribution channels. On the other hand, the asset quality of top-tier retail-focused fincos is strong,” it said.
Resolution of weak assets is key to the banking sector’s recovery. The spurt in corporate defaults is expected to be offset by recoveries of existing nonperforming loans (NPLs) referred to the National Company Law Tribunal under the country’s Insolvency and Bankruptcy Code. But corporate and finco stress will lengthen banks’ recovery period, and we expect only a gradual “u-shaped” recovery.
The overall improvement in the banks’ asset quality will take a few years and significantly hinges on the resolution of large NPLs. The banking sector’s credit growth is likely to be in line with the nominal GDP growth.
Banks’ earnings will remain weak, despite improving marginally, the report stated. The improvement will be on account of a decline in provisioning costs, lower incremental slippages, recoveries from existing NPLs, and higher provisioning coverage.
The government’s plan to infuse Rs 70,000 crore will help replenish the depleted capital of public sector banks. The infusion will help banks make necessary haircuts on their weak corporate loans, and shore up their regulatory capital adequacy, the report added.
“The proposed capital infusion will help resolve the immediate balance-sheet problems of public sector banks. However, unless these banks implement substantial reforms to improve risk management, the need for capital will recur,” it added.