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India Ratings Cuts Banking Sector Outlook To Negative

The revision is largely owing to public sector banks.

The counters in the banking hall of Punjab National Bank in New Delhi, India. (Photographer: Sondeep Shankar/Bloomberg News.)
The counters in the banking hall of Punjab National Bank in New Delhi, India. (Photographer: Sondeep Shankar/Bloomberg News.)

India Ratings & Research has lowered its outlook on India’s banking sector to negative from stable for the last six months of the ongoing fiscal.

The revision is largely owing to public sector banks, forming bulk of the Indian banking sector, as the ratings agency expects a rise in restructured assets and weakness in their financial profile. In case of private banks, it continues to have a stable outlook.

Change in banking sector outlook, is in view of continued capital requirements for public sector banks, an expected spike in stressed assets, higher credit costs, weaker earnings on account of interest reversals and lower fee income, and muted growth prospects in the wake of the measures taken to contain the spread of Covid-19.
India Ratings & Research statement on September 18

India Ratings’ assessment of the banking sector included the following observations:

  • Most public sector banks are expected to report a net loss in FY21.
  • Even in FY22, public sector banks will need to continue to build provision buffers against restructured assets as some of these loans are expected to turn into non-performing assets in FY23.
  • Public sector banks will need capital infusion in the range of Rs 35,000-55,000 crore to manage a minimum Tier-1 capital ratio of 10%.
  • While the system’s credit growth could remain anaemic, and short-term financial performance could deteriorate modestly, large private banks may benefit from credit migration.
  • At least 7.7% of bank credit or Rs 8.4 lakh crore worth loans could be restructured in the coming months, with most loans coming from the corporate loan segment.
  • Non-corporate loans will contribute restructured loans worth Rs 2.1 lakh crore, where agriculture and small and medium enterprises will constitute 85% of these loans.
  • India Ratings estimates banking sector credit cost could range between 2.6% and 3.4% in FY21, depending on the quantum of restructured loans or those slipping into non-performing category.