India’s central bank is trying to clean up the balance sheets of the country’s banks, said S&P Global Ratings in a report titled “Government Support Underpins Ratings On Indian Public Sector Banks.”
The Reserve Bank of India’s (RBI) ongoing asset quality review has tested the government’s willingness to support public sector banks, said the rating agency.
Support has so far been forthcoming, and the Indian government has reiterated its intention of providing capital to public sector banks, even beyond the budgeted amounts, if needed, it noted.
“We continue to believe there is a very high likelihood that the government will support India’s banks, and that forms a pivotal point in our assessments of capital position and extraordinary support for the banks,” said S&P Global Ratings analyst Deepali Seth Chhabria in the report released June 2, 2016.
“If the government support weakens, our issuer credit ratings on Indian public sector banks could deteriorate sharply, depending on our view on the role and link of these banks at that time, and will reflect the incipient weakness of the banks,” said Chhabria.
Most Indian public sector banks reported huge losses in the third and fourth quarter of the fiscal year ended March 31, 2016 (except State Bank of India, Union Bank of India, and Indian Bank).
This came after the central bank tightened the banks’ requirements on classifying nonperforming loans (NPLs).
The RBI has advised banks to recognize select weak loans as NPLs over the
quarters ended December 2015 and March 2016, and make provisions for those loans.
“Over the longer run, the tighter central bank norms are likely to improve transparency in the Indian banking system,” Chhabria said.
“Meanwhile, we expect the asset quality of Indian banks to remain under
pressure in the fiscal year ending March 2017 because the banks are struggling with the weakness in the Indian corporate sector, namely high financial leverage, low capacity utilization, weak commodity prices, and policy-related issues for the infrastructure sector.
“Moreover, the banks have yet to fully recognize weak assets as nonperforming,” she said. fii-news.com
