Funding costs have gone up

Indian banks’ recovery is likely to be lengthy, given the stress in the domestic corporate and nonbanking finance sectors, according to a report “What’s Hurting Indian Banks’ Recovery” published by S&P Global Ratings on 27 August 2019.

“Fragile financial markets, rising risk aversion, and weakness in some highly leveraged corporate sectors will continue to stress Indian banks’ asset quality and growth,” said S&P Global Ratings credit analyst Geeta Chugh.

The growth and profitability of finance companies (fincos) are also likely to remain under pressure. Liquidity has tightened and funding costs have gone up.

“We expect the smaller fincos to increasingly have to resort to an ‘originate and sell’ business model to optimize their large distribution channels,” said Chugh.

On the other hand, the asset quality of top-tier retail-focused fincos is strong.

Resolution of legacy weak assets is key to the banking sector’s recovery.

S&P expects the spurt in corporate defaults to be offset by recoveries of existing non-performing loans (NPLs) referred to the National Company Law Tribunal under the country’s Insolvency and Bankruptcy Code.

But corporate and finco stress will lengthen banks’ recovery period, and S&P expects only a gradual “u-shaped” recovery.

The overall improvement in banks’ asset quality will take a few years and significantly hinges on the resolution of large NPLs.

The banking sector’s credit growth is likely to be in line with the nominal GDP growth.

Banks’ earnings will remain weak despite improving marginally. The improvement will be on account of a decline in provisioning costs, lower incremental slippages, recoveries from existing NPLs, and higher provisioning coverage.

The Indian government’s plan to immediately infuse capital of Rs.70 billion in 2019 will help replenish the depleted capital of the country’s public sector banks.

“We believe this round of infusion will help banks to make necessary haircuts on their weak corporate loans and shore up their regulatory capital adequacy,” said Chugh.

“The proposed capital infusion will help resolve the immediate balance-sheet problems of public sector banks,” she said.

“However, unless these banks implement substantial reforms to improve risk management, the need for capital will recur,” Chung said in the report. fiinews.com