18/03/2015 4:06 PM IST | Updated 15/07/2016 8:25 AM IST

Improvement In Indian Banks' Asset Quality To Take Time: S&P

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NEW DELHI, INDIA - MARCH 11: Union Finance Minister Arun Jaitley during the Quarterly Performance Review Meeting with the Chief Executive Officers (CEOs) of Public Sector Banks and Financial Institutions at Vigyan Bhawan Annexe on March 11, 2015 in New Delhi, India. Government is believed to have asked public sector banks today to consider lowering their interest rates, even as some lenders want further signals on RBIs monetary policy before passing on the benefits to their retail and corporate borrowers. (Photo by Sonu Mehta/Hindustan Times via Getty Images)

NEW DELHI — Improvement in the asset quality of Indian banks and growth in credit offtake is likely to take more time as the problems in mining and infrastructure sector are yet to be resolved, global rating agency S&P said today.

"Any material recovery of corporate loan quality will require improvement in demand in India, deleveraging of corporate balance sheets, and resolution of problems in the infrastructure and metal and mining sectors, all of which will take a while," Standard & Poor's credit analyst Amit Pandey said in a report.

It cautioned that a "prolonged weakness in asset quality of Indian banks could lead us to assess that economic risk has increased". A revival in private sector investments and credit growth, and a reversal in the trend of rising non-performing loan ratios for India's banks is also likely to take time, the report said. "This is despite improving operating conditions for banks because of a reform-minded government and an increased elbow room for the central bank to lower interest rates," added the report 'Despite India's Brighter Economic Prospects, A Banking Revival Is Still A Way Off'. It said the Modi government has promised development and good governance, and a lot will depend on its ability to keep promises and improve the economy.

"We expect the profitability of Indian public sector banks to remain weak, and banks' credit costs to remain elevated," Pandey said. Credit growth in banking sector will improve to 12-13 per cent in fiscal ending March 31, 2016, from less than 10 per cent in the second half of calendar year 2014. S&P expects the pace of growth of stressed assets to fall because a substantial part of the stress has already been recognised.

Capitalisation is a key constraint for some public sector banks in India, the report said, adding that private sector banks are better placed than their PSU peers to meet Basel III capital requirements. The Budget has allocated Rs 7,940 crore for infusion into PSU banks in 2015-16. PSU banks will, therefore, have to raise additional capital through additional instruments or equity markets.

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