India Ratings maintains stable outlook for banks

Last Updated: Wed, Jan 23, 2013 06:12 hrs

Maintaining its stable outlook on the Indian banking sector, India Ratings today said the pressure on the asset quality of banks was expected to subside from the second half of 2013-14. Expectations of continued equity injection, in line with Basel-III requirements, and the cyclical improvement in asset quality also shaped the agency's outlook.

Gross non-performing assets (NPAs) of the banking sector are estimated to rise from about two per cent in 2007-08 to four per cent by March 2013. Though the agency said NPAs would begin to decline from June, Ananda Bhoumik, senior director, India Ratings, said the fall might not be dramatic; the number of loans to be restructured, especially from infrastructure projects, was unlikely to fall.

Earlier, a number of corporate loans had been referred for restructuring. With the slippage from restructured loans expected to moderate, there may be some relief on this front. However, the agency said continuing challenges in project execution by infrastructure companies might result in increased restructuring of loans in that sector, which faced challenges in coal linkages and land acquisition.

Some public sector banks would see major challenges to asset liability management, owing to slow growth in deposits and long-term assets being funded by short term deposits. India Ratings said the growing short-term funding mismatches, which increased refinancing pressures, might keep deposit costs high.

Asset-liability mismatches up to a year have been rising. For some banks, these are at all-time highs. Refinancing risks are partly mitigated by the strong domestic depositor base of government banks. The high pace of refinancing squeezes quarter-end liquidity and may also delay the transmission of a policy rate cut to borrowers.

Banks have been addressing this by pushing long-term deposits.

The government may facilitate raising long-term infrastructure bonds from debt capital markets, helping banks mitigate liquidity pressures, India Ratings said.

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