‘The worst is almost over for India’s banks’

New Delhi: India’s weak banking system will strengthen over couple of years as stressed loans are cleared and capital base expanded by government’s fund infusion in state-owned lenders, S&P Global Ratings said on Tuesday.

In its report titled ‘The Worst Is Almost Over For India’s Banks’, S&P said that the ratings on the banks are “more likely to be raised than lowered” in the next two years. But, weak risk management and internal-control practices limit the potential for considerable upside, it said.

“We estimate that Indian banks’ recognised non-performing loans (NPLs) now cover a substantial part of weak loans in the system, which comprise about 13-15 per cent of total loans,” S&P Global Ratings Credit analyst Geeta Chugh said.

“India’s weakened banking system is set to strengthen over the next couple of years as stressed loans are cleared and capital injections from the government shore up eroded capital bases,” S&P said.

Banks categorised an increasing proportion of weak loans as NPLs due to more stringent requirements by the Reserve Bank and government.

Role of RBI

  • S&P said the central bank is conducting another asset quality review, focusing on 240 corporate loans. Many of these loans are already classified as NPLs, but RBI is said to be probing whether they are under-provisioned.

Government strategy

  • The government is working on a four-pronged strategy to improve the health of the banking sector: recognition, recapitalisation, resolution, and reform. The first three of the ‘4Rs’ has progressed significantly.

The recovery

  • S&P said 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.
  • A turnaround in the earning performance of India’s banks should take place in fiscal 2020 (ending March 31, 2020).
  • This turnaround could be delayed if large unexpected NPLs materialise in the agriculture sector, where for example govt-granted loan repayment waivers could hurt credit discipline.

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