Indian banks to benefit from economic growth, demogaphics: S&P Report
04 Jul 2011
The Indian economy's sound growth, favorable demographics, and underpenetration are likely to benefit banks in the country.
But rising inflation, competition and evolving risk management practices could hinder growth. That's according to an article, titled Industry Report Card: Indian Banks Are Likely To Ride An Economic Growth Wave, that Standard & Poor's Ratings Services published today.
"We expect the sector's asset quality to improve in view of the economy's sound performance. The banks could also benefit from limited loan concentration and India's lower leverage than other Asian countries', in terms of a ratio of overall credit to GDP," said S&P credit analyst Geeta Chugh.
The report stated that earnings pressure on banks in India (unsolicited rating BBB-/Stable/A-3) eased in the fiscal year ended 31 March 2011, as they regained pricing power due to high demand for credit.
The introduction of a base lending rate, which established a floor lending rate, also boosted profitability. In addition, the banks benefited by delaying the repricing of liabilities amid rising interest rates. But trading gains fell as interest rates rose and credit costs increased in sync with asset quality pressure.
"We expect the non-performing loan ratio to start declining in fiscal 2012, later than for banks in other regions. This is because the Indian central bank allowed banks to restructure loans at the peak of the financial crisis without classifying them as nonperforming," said Chugh. The ratio was about 2.6 per cent in fiscal 2011 for Indian banks.
Indian banks' capitalisation is moderate, in our view. To support capitalisation, the government injected capital of Indian rupee (INR) 31 billion into state-owned banks in fiscal 2009 and 2010, and INR201 billion in fiscal 2011. We believe pressure on the banks' capital is likely to ease in fiscal 2012. The government has budgeted INR60 billion to recapitalize banks.
