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.
After years of intense preparation, India is about to take the next step in information and communication technology. Prime Minister Narendra Modi will launch 5G services in India on October 1 and also inaugurate the 6th Edition of India Mobile Congress 2022 to be held till October 4, at Pragati Maidan, Ne
There is this popular saying that epics are never told, but always retold. Ramayana is one such epic and needs no introduction. Its plot is grounded in sacrifice and the end brings out hope that the good always wins. But how is a centuries-old tale of the prince of Ayodhya still relevant for today’s
In pursuance of the pro-people announcement made by the prime minister in 2021 and successful implementation of additional food security under PM Garib Kalyan Ann Yojana, the union cabinet has approved its extension for a further period of three months, from October to December 2022. At a ti
A Case of Indian Marvels: Dazzling Stories from the Country’s Finest Writers Edited by David Davidar Aleph, 390 pages, Rs 999 Change is the only constant, and India has always been doing so. Yet, after independence, if there was a year when the p
“My volume of business has increased ever since I registered on GeM (Government e-Marketplace) in 2017. Earlier, I could supply items only in the vicinity of my shop in Fort area and only within Mumbai. Now, I ship my products all over the country! I have tied up with India Post and three private cou
The Journey of Hindi Language Journalism in India: From Raj to Swaraj and Beyond By Mrinal Pande Orient BlackSwan, 188 pages, Rs 1,195.00 In India, the English-language media is considered the ‘national media’, while the language press