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.
In a major embarrassment to the railways, the much touted Vande Bharat Express developed a technical snag at Chamraula, 15 kms from Tundla junction. Prime Minister Narendra Modi flagged off the train on Friday from New Delhi station. The train was
Indian Railways entered a new era as prime minister Narendra Modi on Friday flagged off the country’s first semi high-speed train, Vande Bharat Express, from the New Delhi railway station. The new train is also seen as a success story of the NDA government’s ‘Make in India’
Riho Kruuv, Ambassador of the Republic of Estonia talks to Vishwas Dass on key issues like the importance of e-Residency programme of the Government of Estonia and why Estonia is becoming a preferred investment destination for Indian startups and budding entrepreneurs. The Ambassador says Estonia offer
There’s no dearth of self-help books. They come in a multitude of single-topic and hybrid varieties: habit change, management, habit change in management, spirituality, spirituality in management...you get the drift. Happiness at Work: Mindfulness, Analysis, and Well-Being, by R Anand, adds to the li
Those who have gained the most from the latest budget are the ones who are going to have the most crucial impact on the Lok Sabha election results. Who are they? They are hiding in plain sight. They have come to work in metros and cities, probably in recent years. They crowd inter-state bus terminals to ta
For a novice reader, MK Gandhi presents a formidable challenge. The starting point is usually the autobiography, with its well-known anecdotes which most of us