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Are the troubles over for the Indian banking sector?
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Rs 67,000 crore
Due to higher provisions for bad loans Public sector banks in India suffered a loss of around Rs 67,000 crore for the quarter ended 31 March 2018 according to BloombergQuint. The government announced a Rs 2.1 lakh recapitalisation programme to provide a reprieve to these banks. While this amount may not be sufficient, the S&P report says that a stable outlook for banks is heavily dependent on similar government support in the near future.
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Publish date: 03rd August, 2018
Introduction
Debt ridden Indian banks have had a rough ride over the last few years. But that may soon come to an end according to Global rating agency Standard and Poor’s (S&P). In a report titled: “The Worst is Almost Over for Indian Banks”, the agency said that Indian banks are likely to see a turnaround in their finances in the next two years.
Indian banks and non-performing assets
Assets that don’t perform (not bringing any returns to banks) are known as Non-Performing Assets or bad loans. At the end of Q4FY18, the total bad loans of the 38 Indian listed banks were as high as Rs 10.17 lakh crore according to Business Today. These bad loans did not balloon up overnight. For a long time, banks gave large loans to corporations regardless of the credit status of these companies. As a result, India ranks fifth among the 39 major economies troubled by bad loans according to Quartz India.
Also read: 5 things to read about bank NPAs
The worst of the bad loans crisis is behind
The weak loans in the banking system comprise of around 13-15% of the total loans. But according to S&P’s estimates, the non-performing loans recognised by Indian banks cover a significant portion of these loans. This realistic recognition of bad loans coupled with rebounding corporate profits and quicker resolution of Non-Performing Assets (NPAs) could help banks recover from this bad-debt cycle.
Also read: Retail loan growth in top gear for banks
Turnaround in 2019-20
There may be another year of high provisions on the balance sheets as public sector banks provide for losses on stressed assets. But this could be followed by an improvement in earnings performance. According to S&P, a potential turnaround in the Indian banking system could take place as early as FY20.
Also read: 5 reasons why bank loan data matters
Risks that could delay recovery
Ratings on banks are more likely to be raised than lowered in the next couple of years according to the report. However, weak risk management and internal control practices could limit the potential for high ratings. In addition, recovery could be delayed if unexpected bad loans materialize from the agriculture sector and loan against property sector in the near future. Another risk that could delay recovery is if the RBI carries out quicker than expected hike in interest rates due to pressure on the Current Account Deficit (CAD).
Also read: 5 Things to know about RBI’s push for bankruptcy code
