Global investment research and rating agency Standard & Poor’s (S&P) on Thursday said the credit growth of Indian banks are likely to remain subdued in the range of 15-20 per cent for the ongoing financial year.
Ritesh Maheshwari, senior director, financial institution ratings (Asia ex-China), S&P, said, “The monetary tightening policy is putting pressure on the banks’ margins and hence the performance of the banking industry will be lower than the last five years’ average. Also, the share of non-performing loans with the banking system will go up in India.”
High inflation has prompted most of the central banks across Asia to tighten their monetary policies, which has led to higher interest rates and, in some cases, rationed credit growth. To rein in credit growth, central banks in India, Vietnam and China have been most hawkish and have raised policy rates and cash reserve ratios several times.
S&P pointed out that although the risk-taking system of Indian banks will be mildly impacted, the outlook on profitability is moderated as compared with that of the last year. “The capital expansion plans of Indian banks will also be moderated for the financial year. The overall economic growth across Asia would be slower,” Maheshwari added.
S&P warned that the banking systems in Asia might have averted the US sub-prime upheaval, but they are not immune to economic slowdowns.
S&P expects a gradual increase in credit costs from the current historic low level for all systems, starting from property-related lending for some systems. A steep rise in interest rates in Vietnam and India will be an additional pressure point for many borrowers. While unsecured consumer loans (including credit card outstandings) are always the first to show stress, other loan classes are not immune to it.
Asian banks will experience some turbulence, but they are not expected to face a crisis, S&P said in a report titled, ‘Slower Economic Growth Poses Turbulence But No Crisis For The Asian Banking Systems,’ published on Thursday on RatingsDirect.
This is mainly pegged to two reasons, firstly, economic outlooks are better than those for other countries, and secondly, the regulatory frameworks and banks’ credit profiles have strengthened considerably.
“A bearish market sentiment has been trampling equity markets and that will take some shine off trading and fee income for some banking systems,” said Maheshwari.
The sensitivity of banking systems to economic declines depends broadly on the total debt in the system (corporate and household) and the strength of the banking industry to withstand or respond to changes in the environment.
