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Banks stay stressed till 2015 but can meet Basel-III norms: S&P

Last Updated: Monday, February 25, 2013 - 21:30

Mumbai: Global ratings major Standard & Poor's (S&P) Monday said the asset situation of Indian banks will continue to be under stress next fiscal and the scenario will improve only by 2015, as economy starts to look up.

"The troubles for the banking system here are likely to increase in the next 12 months due to slow economic growth and sluggish fiscal reforms," the agency said in a report, adding the woes are close to bottoming out.

Its credit analyst Geeta Chugh in a conference call said the share of the gross non-performing assets (NPAs) in the system will rise to 4.4 percent by March 2014, higher than 3.9 percent it estimates for March 2013 and far higher than 2.4 percent and 2.9 percent witnessed in FY11 and FY12, respectively.

"We expect the economic activities to start recovering in FY14 and the benefits will percolate down to the banking sector with a lag. Hence, we expect the difficult phase for the banks to end in 2015," Chug said.

The stress in banking is coming from sectors like power, with state distribution companies and private generators reporting difficulties, road building, textiles and aviation, she said, adding a majority of these sectors will see an improvement over the years as the economic climate improves.

Chugh attributed the rise in stressed assets to a slowdown in the corporate sector, stating the retail sector has largely remained resilient as the economic gloom has not affected wages and salaries so far.

The corporate sector, she said, is close to its bottom and there will be a recovery in six months, offering banks a ray of hope.

"We expect the credit profiles of Indian corporates to gradually recover in the latter half of fiscal 2014 and that should boost the fortunes of banks as well," Chug said.

The agency expects credit growth to be muted at 16-17 percent, at par with the estimate for FY13.

On the rating prospects for banks, Chugh said the outlook continues to be negative, in line with the agency's assessment of the sovereign rating.

However, Chug is confident about the country's banks meeting the higher capital requirements under the Basel III norms, which will be kicked in from April this year.

Domestic banks will be easily able to deal with the additional capital requirements to comply with the Basel-III norms, but there will be funding difficulties, especially for the government, to fund banks in FY17 and FY18 by when the requirements will peak, Chugh said.

"We expect the immediate shortfall to be around USD 3-4 billion but till March 2018, we expect the system to require up to USD 15 billion in fresh capital, assuming a credit growth of 18 percent and their adherence at meeting the core tier-I capital requirement of 8 percent," she said.

The requirement will "shoot up sharply" if the banks decide to have the tier-I capital at a higher point than the prescribed 8 per cent, she added.


First Published: Monday, February 25, 2013 - 20:14
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