Security men stand guard inside a branch of the State Bank of India at Nariman Point, Mumbai. (Photographer: Sebastian Di Souza/Bloomberg News)

India Banks’ Asset Quality Remain A Concern: Moody’s And ICRA

Weak asset quality remains a key dampener for Indian banks’ prospects in the medium term, according to Moody's Investors Service and its Indian affiliate, ICRA Ltd.

"Asset quality will remain a negative driver of the credit profiles of most rated Indian banks and the stock of impaired loan," says Alka Anbarasu, Vice President & Senior Analyst at Moody's.

Anbarasu expects non-performing loans and standard restructured loans to rise in the medium term.

The asset quality review (AQR) introduced by the Reserve Bank of India’s (RBI) in 2015 is one of the important catalysts forcing banks to recognise some large accounts as impaired, according to Moody’s.

The ratings agency estimates that the "true" level of impaired loans for Indian banks to be around 1-1.5 percent higher than the latest reported numbers.

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.

…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.
Karthik Srinivasan, Senior Vice President At ICRA

Another area of concern highlighted by ICRA is the overall capitalisation level of most public sector banks, which they term as “moderate to weak”, as of September 30, 2016. With retail participation remaining subdued in the near future, the ratings agency says the majority shareholder, i.e., the government will have no option but to pump in more money into some of these public sector lenders.

“The government may need to materially increase the quantum of capital infusions into the public sector banks, in view of the fact that investor appetite for common equity remains subdued,” ICRA wrote in the note.

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