By K. Raveendran
Global ratings agency Standard & Poors has expressed disappointment over the pace of reforming the Indian banking sector as part of the programme to address the system’s non-performing assets. The agency noted that although a few initiatives have been announced to reform the sector, very few steps have been taken so far and the follow-through action on the announced reforms has been weak.
S&P said that if successfully implemented, the reform has the potential to strengthen the sector over time, but the progress so far on this front is disappointing.The recent fraud case at Punjab National Bank highlights the weak internal controls and vulnerabilities in risk management in Indian banks, it noted.
Noting that the large NPLs were pushed through the new insolvency process, S&P estimated that the stock of weak assets in the banking sector is now between 13 and 15 percent. It notes the bankruptcy law passed in May 2016 as a positive as it gives lenders more power to recover assets. The Reserve Bank of India also introduced more stringent resolution norms.
“We believe that announcements such as smoothing provisioning for mark-to-market losses on investments over four quarters will temper but not offset the immediate burden from strained performances,” S&P said. In a report titled ‘India’s Banks Are Bracing For Weak Fiscal 2018 Results’, S&P said it believes that at a system level the ratio of stressed assets is realistically around 13-15 per cent, compared with 12.3 per cent in the first half of fiscal 2018.
“We don’t expect the ratio to rise higher than our estimates, barring one-off events that are difficult to anticipate, such as the fraud case at Punjab National Bank,” S&P said.
The S&P report gives due consideration to the large recapitalization plan of about $32 billion put in place by the government. In fact, India’s Rs 2.1 trillion recapitalisation programme primarily relies mostly on the government, it points out. This includes capital infusion of Rs 570 billion, budget allocation of Rs 180 billion and recapitalisation bonds worth Rs 1,350 billion.
S&P, however, expectes the public sector banks to suffer continued losses in fiscal 2019. But it said it stood by the stable outlook on Indian banks, with the government support protecting most public sector banks.
The agency considered the Indian banks’ results for the fiscal year ended March 2018 to be weak. “While recent announcements are net negative for bank results, we believe that rating downgrades are unlikely. This is because our expectations for fiscal 2018 were already low for most banks,” S&P Global Ratings Credit Analyst Michael Puli had said in a report in April.
S&P Global Rating had classified the Indian banking sector under ‘Group 5’ along with countries such as Italy, Spain, Ireland, the UAE and South Africa on the basis of their economy and industry.
Noting that the ‘low-income’ Indian economy and the government’s limited fiscal flexibility constrain the country’s economic resilience, S&P in its Risk-Assessment report said the medium-term outlook for growth remains healthy, which “provide sound development opportunities for Indian banks”.
“We classify the banking sector of India in group ‘5’ under our Banking Industry Country Risk Assessment (BICRA). The other countries in group ‘5’ are Spain, Ireland, Italy, Panama, Bermuda, Poland, Peru, Qatar, South Africa and the UAE.
“The medium-term outlook for India’s growth remains healthy due to good demographics, public and foreign direct investments, private consumption, and reforms such as the removal of barriers to domestic trade through GST,” it said. (IPA Service)
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