Rising NPAs unlikely to dent bottomlines: S&P

The three-year loan party when bank credit rose by around 30 per cent annually is likely to increase the quantum of bad assets, especially in the housing segment. Yet, the banking industry, with improved performance and financial profile, is expected to remain healthy, according to a Standard & Poor's (S&P) and Crisil report.

Retail loans, including home loans, form 25 per cent of the total credit portfolio of banks. Housing credit accounts for 50 per cent of the retail portfolio. Its repayment period is spread over a maximum of 25 years. Some loans disbursed in the last 2-3 years could turn into non-performing assets (NPAs), Crisil said.

The NPAs may grow in absolute numbers due to rapid credit growth in the previous three years. But the NPA ratios are expected to remain healthy since the financial profile of the banking industry is adequate and stable.

The asset quality has improved vastly over the past four years, Ritesh Maheshwari, director & team leader, financial institutions ratings, S&P, said in a banking sector report titled "India top 25 banks".

"Stiff competition will continue to put pressure on banks' profitability as the Indian banking sector remains highly fragmented. The risks associated with rapid credit growth, potential volatility in the economic environment, a fragmented sector structure, and still-developing risk management capabilities are constraining factors," he said.

Meanwhile, S&P and Crisil, in a study of Indian companies titled "Indian top 100 corporates," said, "In an environment of strong economic growth in the past four years, the corporate sector has displayed a trend of consistent double-digit revenue growth. This trend is evident across the broad for industrial sectors in India."

Revenue growth in the software and IT services sector was mainly supported by the continuing trend in offshore IT services, especially from the US and Europe, while the revenue growth in the automotive sector was underpinned by favourable demographic and economic factors, such as rising income levels and a growing middle class.

The operating margins and cash flows have remained largely stable for Indian corporates, although some initial indications of pressure were exhibited in 2006. Select corporates' operating margins are starting to experience some pressure, said Anshukant Taneja, director & team leader, corporate & infrastructure ratings, said, adding,

"This is due to the volatility in prices, which has either affected the companies' top line sales or their costs of production."