Higher refinancing pressure on banks and slower deposit accruals may dilute the effect of any monetary easing during 2013-14, according to India Ratings.
The credit rating agency said refinancing risk, particularly for Government banks, had been rising as long-term loans (infrastructure, residential mortgage) were increasingly been financed by short-term deposits (up to one year).
Funding pressure is also enhanced by the low real interest rates on deposits, leading to slowing deposit growth.
This pressure coupled with the higher refinancing (replenishing maturing deposits) requirement that banks now face may keep deposit costs elevated through 2013-14.
Bad loans to peak Asset quality
“Banks would likely focus on preserving net interest margin by maintaining base lending rates, which may mean that any reduction in policy rates by the Reserve Bank of India may not be fully passed on to borrowers,” said India Ratings in its 2013 Outlook for Indian Banks . Indian banks will benefit from an expected cyclical uptrend in the domestic economy during 2013-2014.
Gross non-performing loans are likely to peak till mid-2013 and ease off during the second half of 2013.
While cyclical pressures ease off, banks will remain exposed to the infrastructure sector where project delays are due to administrative and policy constraints that may take longer to resolve. The volume of restructured infrastructure loans may, therefore, rise, said the ratings agency.
However, the Union Government has initiated key reforms in the operations of State electricity boards and their tariff policies that should help maintain the long-term viability of projects.
Further increases in exposure to the infrastructure sector may be negative for banks’ asset quality, unless Government reforms help reduce execution challenges faced by projects.
Retail borrowers leveraged
Consumer loans have picked up in recent quarters and may continue to grow, as banks view them as safer for growth.
The average consumer is now more leveraged than a decade earlier, as rising home prices have outpaced increases in salary levels, which now means a greater share of monthly incomes goes on equated monthly instalments than before, India Rating said.
The retail business is, therefore, prone to asset quality pressures, particularly if collateral values of the two most popular products — residential mortgage and gold loans — were to fall significantly.