Bad loans will continue to rise despite a marginal improvement in the profitability of banks in the fiscal year 2014-15, according to rating agencies.
Fresh bad loans are expected to remain at elevated levels of over 3 per cent in the short term, even as economic revival will be key for reduction in slippages, as per ICRA rating agency.
Of all impaired loans at public sector banks, 20 per cent are discom exposures, with the proportion ranging as high as 48 per cent at some of the most exposed banks, Moody's Investors Service pointed out in a report.
The power sector would continue to be a source of asset quality risk for public and private sector banks in India if the poor financial profiles of state electricity board distribution companies (discoms) do not improve through further structural reforms, said Moody’s said in a statement.
The non-performing assets (NPAs) of public sector banks (PSBs) are expected at 4.4 to 4.7 per cent as on March 31, 2015 as against 4.4 per cent as on March 31, 2014. A lag of one-two quarter expected to reflect the impact of economic recovery on the fresh NPA generation.
As per Fitch Ratings, there is some evidence of higher recovery rates, but the write-downs and portfolio sell offs to asset reconstruction companies are likely to play a larger role in reducing reported NPAs.
PSBs' exposure to sensitive and structurally weak sectors is high, and we do not expect any dramatic recovery in the near-term, Fitch said.
"So far, these problems have almost exclusively affected public sector banks, which represent more than 70 per cent of total banking system assets, and which are directly and indirectly exposed to the credit quality of discoms," said Srikanth Vadlamani, Vice President and Senior Analyst at Moody's.
For all PSBs and private banks, gross NPAs could remain at 4 to 4.2 per cent by March 2015 as against 3.9 per cent as on March 2014, ICRA said in a conference call about Indian banks.
It expects marginal improvement in their profitability (up to 10 bps) along with 15-35 per cent growth in profit after tax in FY2015 as against decline of 27 per cent in FY2014. “Improvement may be visible from Q2, FY2015 as Q1, FY2014 was exceptionally good,” it said.
Overall credit growth may revive marginally at 14-15 per cent in 2014-15 while private sector banks may continue to outpace PSBs in credit growth, ICRA said adding that any meaningful recovery in core earnings would be dependent on reduction in asset quality pressures.