The operating performance of some Indian banks is likely to remain weak in the fiscal year ending 31 March 2013 as the economy's slower growth than in the recent past, a dip in credit growth, rising repayment delinquencies, and tighter margins could cause a deterioration in performance.
According to a report, India Banking Outlook: Economic Headwinds Are Likely To Lower Asset Quality And Earnings In 2012, Standard & Poor's Ratings Services published recently.
"The asset quality of Indian banks is likely to remain weak, or even deteriorate, due to the moderation in economic activity, high inflation, and high interest rates," says Standard & Poor's credit analyst Geeta Chugh. "We expect restructured loans to rise in fiscal years 2012 and 2013. Small and mid-size companies are particularly vulnerable."
According to the report, credit growth in India is likely to weaken to 16 per cent-17 per cent in fiscal years 2012 and 2013, from about 23 per cent in fiscal year 2011.
Standard & Poor's expects net interest margins of Indian banks to remain tight in fiscal year 2013 due to intensifying competition amid low credit growth, and borrowers' limited ability to absorb higher interest rates.
The report noted that the stand-alone credit profiles of a few Indian banks could weaken due to a decline in asset quality and earnings. The ratings on government-owned banks, which face greater exposure to asset quality deterioration, could benefit from a "very high" likelihood of government support. Such support underpins the stable outlook on the ratings on Indian banks.