Just growth, fiscal improvement can't resolve NPA issues: S&P

Mumbai: Global ratings agency Standard & Poor's (S&P) on Wednesday called for a multi-pronged strategy to help banks tide over asset quality issues, saying stronger economic growth and improvement in fiscal situation alone cannot resolve the crisis.

"Work is needed on multiple other facets, including pick-up in industrial demand, de-leveraging of balance sheets, resolution of problems in stressed sectors like infrastructure and metals and mining, and pass-through of lower interest rates to borrowers to improve the asset quality," an S&P report said.

The agency noted that while improvements in policy making have raised prospects for a stronger economic and fiscal performance, there is need for action on other fronts to improve the weakness in asset quality, which it termed as a "risk".

"Economic risks could increase in the absence of such steps and lead to a continuous increase in stressed assets for the banking sector," S&P said.

It added that for the next 12 months, it expects risks from economic imbalances to be low as credit growth remains moderate and inflation-adjusted property prices are likely to decline.

However, the report said the economic risks trend, which affects the banking sector, is "negative".

Gross non-performing assets (NPA) grew to 4.8 percent as of the quarter ended September, from 4.4 percent in the previous three months, according to domestic rating agency ICRA.

The report said the "modestly improving reform momentum" will promote "greater economic flexibility and help build fiscal buffers, which are currently weak".

"The country's credit risk remains high, with weak foreclosure laws accentuating challenges despite moderate private sector debt," the agency added.