Asset quality will remain a negative driver of the credit profiles of most rated Indian banks
GN Bureau | January 9, 2017
Moody's Investors Service and its Indian affiliate, ICRA Limited, see subdued prospects for India's banks, with both identifying asset deterioration as a key challenge over the medium term.
"Asset quality will remain a negative driver of the credit profiles of most rated Indian banks and the stock of impaired loans. Non-performing loans (NPLs) and standard restructured loans will still rise during the horizon of our outlook," says Alka Anbarasu, Moody's vice president and senior analyst.
According to Moody's, such pressure on asset quality largely reflects the system's legacy problems, as relating to the strong credit growth seen in 2009-2012, when the investment plans of Indian corporates rose significantly.
Nevertheless, aside from these legacy issues, the underlying asset trend for Indian banks will be stable because of a generally supportive operating environment. While corporate balance sheets stay weak, a further deterioration in key credit metrics such as debt/equity and interest coverage ratios has been arrested, says a Moody’s statement issued in Singapore on Monday.
"We expect the pace of deterioration in asset quality over the next 12-18 months should be lower than what was seen over the last five years, and especially compared to FY2016, even as we consider those remaining problem loans which have not been recognized as such in several large accounts," says Anbarasu.
In this context, Moody's also considers the Reserve Bank of India's (RBI) asset quality review (AQR) in 2015 as a particularly important catalyst in pushing banks to recognize some large accounts as being impaired. As a result, Moody's now estimates that the "true" level of impaired loans for Indian banks to be around 1-1.5 percentage points higher than the latest reported numbers.
Given the magnitude of stressed assets in the system, Moody's expects the banks to increase their focus on resolving some of the large problem accounts.
"In this regard, we expect an increased pace of debt restructuring under the various schemes offered by the RBI, including the scheme for the sustainable structuring of stressed assets (S4A), strategic debt restructuring (SDR) and the 5:25 scheme," says Anbarasu.
"Nevertheless, weak reserving levels and continued pressure on profitability will limit the ability of the banks to proactively resolve problem assets under these schemes."
From ICRA's viewpoint, a muted level of credit off-take -- on the back of weak demand, increasing competition and greater disintermediation -- will continue to exert downward pressure on lending rates.
"Such a development will be partly offset by the fall in the cost of funds, but stubbornly high operating expense levels and elevated credit costs will continue to dent profitability matrices for the banks," says Karthik Srinivasan, ICRA senior vice president.
"And while bank profitability is not expected to be as weak as the levels seen in FY2016, the weakness in asset quality will continue to drag on profitability indicators, with return on equity remaining in the single digits for FY2017 and FY2018," says Srinivasan.
The Indian government's current plan of infusing Rs 450 billion during FY2017-FY2019 -- of which Rs 164.14 billion have been already infused in the current year -- is below ICRA's estimates of capital requirements of Rs 1,500-1,800 billion until FY2017-FY2019.
Our hearts almost skipped a beat when we heard community health officer (CHO) Dr. Sandeep Kakuste’s success story with baby Pinki Lakhan Patil, who was born underweight in a brick kiln. Pinki weighed 1.7 kg at birth. As she was on exclusive breastfeed she could not have gained weight by any other met
A videography survey in the Gyanvapi mosque in Varanasi this month, along with a similar survey in the mosque in Mathura permitted by a court, has brought the Places of Worship Act under focus after a gap of three decades. In 1991, at the peak of the Ram Janmabhoomi movement, the PV Narasimh
The Government of Gujarat had set up a task force committee in February 2022 under the chairmanship of Dr. Hasmukh Adhia, former union finance secretary, to work out a strategy for the state to contribute in making India a USD 5 trillion economy, as per the vision of the prime minister. In three months, th
This time it was not Lord Hanuman, but the poor decision-making of the political leaders combined with several global economic factors that set Sri Lanka in flames. A state of emergency was declared in Sri Lanka. This month, after the Prime Minister of Sri Lanka resigned from his post, the
Being and Becoming Multilingual: Some Narratives Edited by Rajesh Sachdeva and Rama Kant Agnihotri
The BrihanMumbai municipal corporation (BMC) has rejected the Congress accusations of financial irregularities worth Rs 8,000 crore—9,000 croe in awarding contracts for getting project-affected people (PAP) tenements on private land. BMC has said that it implements vital p