Economic slack constraining recovery of bank NPAs: S&P

With no immediate prospects of an improvement in the pace of economic growth, the Indian banking sector is unlikely to recover in the next 18-24 months, says a new report, Slack Economic Growth Dents Recovery Prospects For Indian Banks, from Standard & Poor's Ratings Services.

The report says slow economic growth is constraining the corporate sector, the chief recipient of banking credit.

"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. "We no longer expect the corporate sector to mildly recover in fiscal 2014, given slower-than-expected GDP growth, heightened currency volatility, and high interest rates."

The report expects the banking sector's non-performing loan (NPL) ratio to surge to 3.9 per cent of total loans in fiscal 2014 (ending 31 March 2014) and to 4.4 per cent in fiscal 2015, compared with 3.4 per cent in fiscal 2013. The return on assets would also remain depressed, at about 0.9 per cent.

Indian banks have restructured 5.7 per cent of their aggregate loan balances as of 31 March 2013. The Reserve Bank of India allows banks to exclude these loans from their reported NPLs until fiscal 2015.

"We expect restructuring to remain high in the next two years because of the weak economy and the regulatory allowance."

The ratings agency has revised its forecast for India's GDP growth to 5.5 per cent for fiscal 2014 from 6.0 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 Standard & Poor's credit analyst Mehul Sukkawala. "We believe that the infrastructure (power and road), metals and mining, construction, and capital goods sectors are particularly at risk."