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India’s Banks Could See A Turnaround By FY20, Says S&P Global

The worst of the bad-loan problem is over for Indian banks with an earnings turnaround possible as soon as the next financial year.

That’s according to S&P Global, which said in a report that it expects India’s banking system to strengthen in the next few years. “We estimate that Indian banks’ recognized non-performing loans now cover a substantial part of weak loans in the system, which comprise about 13 percent to 15 percent of the total loans,” it said. “This more realistic recognition, coupled with rebounding corporate profits and quicker resolution of non-performing assets under the new bankruptcy law, will help banks gradually recover from a protracted bad-debt cycle.”

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Provisions for bad loans, according to the report, led to a record loss of over $9 billion (around Rs 67,000 crore) for public-sector banks in the quarter ended March 31, 2018.

Though it may not be sufficient, the Rs 2.1 lakh-crore recapitalisation programme announced by the government is providing a reprieve, S&P Global said. “Our stable outlook on banks is underpinned by our expectations of a very high likelihood of government support.”

This comes as India’s lenders enter the last month before the Reserve Bank of India's deadline to complete resolution of stressed loans larger than Rs 2,000 crore. If the banks fail to meet this deadline, the cases will be pushed into bankruptcy. “Then stressed assets could expand more than we expect.”

S&P Global expects another year of high provisioning by the state-run banks followed by a turnaround in the earning performance in the financial year 2019-20.

Risks That Could Delay Recovery

  • If large unexpected non-performing loans materialise in the agriculture sector.
  • If larger and faster-than-expected hikes in interest rates are carried out due to pressure on the current account deficit.
  • If the rupee depreciates further, which could hurt unhedged corporate borrowers.

According to the report, the RBI is reportedly conducting another asset quality review with a focus on 240 corporate loans, looking for instances of under-provisioning.

Also read: Is RBI In The Midst Of Another Asset Quality Review?