Subdued prospects for Indian banks: Moody’s

Asset quality will remain a negative driver of the credit profiles of most rated Indian banks

GN Bureau | January 9, 2017


#Reserve Bank of India   #Baking   #ICRA   #Moody's   #RBI  
Representational image
Representational image

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.

Comments

 

Other News

PM visits crash site, meets the injured

Prime minister Narendra Modi on Friday visited the Air India flight crash site in Ahmedabad to assess the situation first-hand. He met officials and emergency response teams working tirelessly in the aftermath of the disaster. He also condoled the loss of numerous lives in the tragic air accident. He con

Air India flight crashes in Ahmedabad

The Air India flight to London crashed in Ahmedabad within munites of the take-off Thursday afternoon. There were 232 passengers and 10 crew members aboard, and reports suggest there was slim chances of anyone surviving. The Boeing 787 Dreamliner crashed and exploded in a fireball barely out

Cabinet approves two multitracking projects of Railways

The Cabinet Committee on Economic Affairs, chaired by prime minister Narendra Modi, on Wednesday approved two projects of the railways ministry with a total cost of Rs. 6,405 crore. These projects include:  1. Koderma – Barkakana Doubling (133 Kms): The project sec

Unlocking the boundless possibilities within

The legendary Jack Canfield (co-creator of Chicken Soup for the Soul series, and author who has sold more than 500 million books) says, “This is the book we’ve all been waiting for.” That is ‘Manifest of Your Infinite Riches’ by Pushkar Anand, founder of the Centre for Infinit

The Good, the Bad and the Ugly of AI

From ‘The Matrix’ to ‘Iron Man’, AI has long captivated our imagination. But what was once fiction has rapidly become foundation. AI is now transforming industries, economies and daily life. Nations are investing heavily – recognizing AI`s role not only as a technological marv

The Tricolour flies high over Chenab Rail Bridge: PM

Prime minister Narendra Modi celebrated the hoisting of the tricolour on the iconic Chenab Rail Bridge, the world’s highest railway arch bridge which was inaugurated on Friday, describing it as a moment of immense national pride and a testament to India’s growing capability to build futuristic

Visionary Talk: Amitabh Gupta, Pune Police Commissioner with Kailashnath Adhikari, MD, Governance Now





Archives

Current Issue

Opinion

Facebook Twitter Google Plus Linkedin Subscribe Newsletter

Twitter