Indian banks’ troubles not over yet, says S&P

live Mint :Joel Rebello  |  Dinesh Unnikrishnan   Feb 26 2013. 12 29 AM IST

Rating firm sees the benefits of the govt’s reform initiatives flowing into the banking sector with a lag

 A continuing slowdown in Asia’s third largest economy and sluggish fiscal reforms are likely to increase the “troubles” of India’s banking system in the next one year and any improvement in the situation is likely only in the year to 31 March 2015, rating agency Standard and Poor’s (S&P) said on Monday.

S&P expects total non-performing assets (NPAs) of Indian banks to increase to 4.4% of loans by March 2014 from an estimated 3.9% in March 2013.

The performance of the Indian economy and, hence, the corporate sector is, however, likely to start improving in the second half of fiscal 2014, the rating company said in its banking outlook report.

S&P expects India’s gross domestic product (GDP) growth to improve from a decade low of 5.5% in fiscal 2013 to 6.4% in 2013-14 and further to 7.2% in fiscal 2015.

“Revival in private consumption, improvement in agriculture output assuming a normal monsoon, pre-election welfare spending, low interest rates and mild recovery in exports will be the main reasons for the economic recovery,” said Geeta Chugh, director and analytical manager, financial institutions ratings, emerging Asia, S&P.

India is likely to vote for a new Parliament in May 2014 and the government is likely to raise welfare spending to woo voters.

The rating firm said it assumes the Indian government will be able to carry forward its recent reform initiatives, which could improve operating conditions for the corporate sector. The benefits of these measures could also flow into the banking sector with a lag, S&P said in the report.

“Things are changing in the last six months and the early signs are positive for the corporate sector. For example, if the cabinet committee on investment is implemented in the right spirit, it will address the bottlenecks in the power sector and issues linked to land acquisition. But it is at least six months away from now,” said Mehul Sukkawala, director, corporate and government ratings, south Asia, S&P.

S&P has a negative outlook on all Indian banks reflecting its rating on the sovereign. In April, S&P changed India’s outlook to negative from stable, citing deteriorating fiscal conditions. At “BBB-”, India has the lowest investment grade among its emerging market counterparts—Brazil, Russia and China.

The S&P analysts declined to share any insights on India’s sovereign outlook.

S. Ranganathan, head of research at LKP Securities Ltd, said India’s annual budget to be presented by finance minister P. Chidambaram later this week will be crucial in assessing how soon the country will return to the high-growth path. “The government will have to rein in the fiscal deficit to 4.8% of GDP next year. For banks, the problems are well known as credit growth has slackened to 8% in the first nine months of this fiscal from more than 12% last year. Going forward, it is possible that the NPA situation will worsen and profitability impacted as banks increase provisions in line with Reserve Bank norms,” Ranganathan said.

S&P expects return on assets of banks to improve to an average of 1% in 2014-15 from 0.9% currently. It will remain at 0.9% average in the fiscal ending 31 March 2014.

However, the rating agency did not give an estimate for NPAs in March 2015.

“A lot will depend on how the corporate sector performs. The improvement will only be gradual, and policy will play a big role in sectors like power, roads, metals and mining,” Chugh said.

The Reserve Bank of India released guidelines for new bank licences on Friday, but S&P said it is unlikely that the new players will pose problems to the incumbents any time soon.

“Entry of new banks will be a protracted affair and will not impact the sector in the next few years,” Chugh said.