Pain ahead for banks next year, but loans to grow 16-17% — S&P

The coming financial year would be bad for Indian banks, but things could improve in 2014-15 as economic growth picks up and their condition would improve, ratings agency Standard & Poor’s said.

It predicted a loan-growth of 16%-17% for 2013-14, in line with its projection for the current financial year ending next month.

Indian banks have been hit with rising loan defaults (non-performing assets), poor deposit rates due to high inflation, a slowing economy and other factors over the last 12 months.

“For at least the next 12 months or so, the country’s banking sector is likely to continue to bear the effects of slow economic growth and the sluggish pace of fiscal reforms.We believe deteriorating asset quality and earnings could continue to constrain credit profiles of Indian banks over the next year,” S&P, which is the majority shareholder of India-based CRISIL, said.

It listed several reasons for the poor performance of Indian banks — a sector dominated by ICICI Bank Ltd, State Bank of India, HDFC Bank, Axis Bank etc.. The ails of the corporate sector has raised the non-performing assets of banks and hit banks’ earnings, S&P said.

“The corporate sector’s financial performance has deteriorated over the past 18 months, largely due to policy issues, regulatory uncertainty, and weak demand. This led to increased restructuring of loans as well as higher corporate defaults. The ban on mining in some states, cancellation of environmental clearances and delays in granting fresh clearances, lack of timely action to address structural issues in sectors such as power, and obstacles to land acquisition hurt corporates. This affected small and midsize corporates more than their larger peers,” it added.

On the consumer front, people have not been keen to make bank deposits due to the high rates of inflation. Consumer prices are increasing at about 11% a year, while the banks are offering deposit rates of about 9% a year.

“The country’s domestic savings base is large and growing. The banks therefore do not depend much on external borrowings. However, deposit growth in India has slowed down in recent years due to falling real interest rates on deposits amid rising inflation. Depositors have opted to hold cash or reallocate some savings to assets such as gold and real estate,” it pointed out.

However, S&P is bullish on the Indian economy starting its recovery next year.

It has Indian GDP growth targets of about 5.5% for fiscal 2013, 6.4% in fiscal 2014, and 7.2% in fiscal 2015 (click chart above), and expects more “more cuts” in RBI’s interest rates in the next 12 months.

“We also anticipate an increase in government welfare spending ahead of the general elections due in 2014. And increased agriculture output (assuming a normal monsoon season) will support consumption. We also expect a mild recovery in exports, given the improving global economic conditions, which should enhance growth in industry and services. At the same time, investments should start improving in fiscal 2015 following likely reforms in the mining, electricity, and other related sectors,” it said.

However, “a lot depends on whether the government is able to push reforms and spur growth,” it added.