Asset quality issue: Indian banks' profitability and capital requirement to remain under pressure, says Moody's

Moody's Investor Services said that they see subdued prospects for Indian banks with asset deterioration as a key challenge over the medium term.

Alka Anbarasu, a Moody's Vice President said, "Asset quality will remain a negative driver of the credit profiles of most rated Indian banks and the stock of impaired loans. Non-performing loans (NPLs) and standard restructured loans will still rise during the horizon of our outlook."

Karthik Srinivasan an ICRA Senior Vice President said,  "While banks profitability is not expected to be as weak as the levels seen in FY2016, the weakness in asset quality will continue to drag on profitability indicators, with return on equity remaining in the single digits for FY2017 and FY2018." 

She added, “We expect the pace of deterioration in asset quality over the next 12-18 months should be lower than what was seen over the last five years, and especially compared to FY2016, even as we consider those remaining problem loans which have not been recognized as such in several large accounts.”

Moody's feels the legacy issues of asset quality will be stable for Indian banks because of generally supportive operating environment.

As per Moody's, the Reserve Bank of India's (RBI) asset quality review (AQR) in 2015 will act as an important factor in supporting banks to recognise some of large accounts being impaired. 

Thus, Moody's expect, the true level of impaired loans for Indian banks to be around 1-1.5% points higher that the latest numbers.

Anbarasu said, “In this regard, we expect an increased pace of debt restructuring under the various schemes offered by the RBI, including the scheme for the sustainable structuring of stressed assets (S4A), strategic debt restructuring (SDR) and the 5:25 scheme.”

Presently, to tackle the asset quality problem, the Indian government has decided to infuse in Rs 450 billion during FY17-FY19. Rs 164.14 billion has been already infused in the year 2016. 

ICRA stated that it is below their estimates of capital requirement which is around Rs 1500 billion - Rs 1800 billion until FY17-FY19.