The Indian banking sector is unlikely to recover in the next 18-24 months due to slower growth constraining the corporate sector, according Standard & Poor's Ratings Services report.

In its report ‘Slack Economic Growth Dents Recovery Prospects For Indian Banks’, S&P said, “We base our view on slow economic growth that is constraining the corporate sector, the chief recipient of banking credit.”

According to Geeta Chugh, credit analyst, S&P, "Deteriorating asset quality and earnings are likely to constrain the credit profiles of Indian banks over the next two years. We no longer expect the corporate sector to mildly recover in fiscal 2014, given slower-than-expected GDP growth, heightened currency volatility, and high interest rates."

The report expects restructuring to remain high in the next two years because of the weak economy and the regulatory allowance.

Indian banks have restructured 5.7 per cent of their aggregate loan balances as of March 31, 2013.The Reserve Bank of India allows banks to exclude these loans from their reported non-performing assets until fiscal 2015.

It expects the banking sector's NPA ratio to surge to 3.9 per cent of total loans in fiscal 2014 (ending March 31, 2014) and to 4.4 per cent in fiscal 2015 compared with 3.4 per cent in fiscal 2013.

Lowers GDP growth forecast

S&P also revised its GDP growth forecast for India at 5.5 per cent from 6 per cent for fiscal 2014.

"The corporate sector's weak performance, combined with high interest rates and a weak rupee, is likely to weaken debt servicing for these companies," said S&P’s another analyst Mehul Sukkawala.

We believe that the infrastructure (power and road), metals and mining, construction, and capital goods sectors are particularly at risk, he said.

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