"Banks are expected to remain largely resilient to the cyclical downturn as increases in loan loss provisions and common equity injections in 2014 will likely help them maintain adequate defenses," Ananda Bhoumik, Senior Director and Head (Financial Institutions) at India Rating, said.
Bhoumik was talking to reporters while releasing a report, '2014 Outlook: Banks-Resilient, but finely poised'.
"These factors underline the stable outlook for the banking sector this calendar year, even as it continues to face credit quality pressures from loan concentration, borrowers' over leverage and the prevailing economic slowdown."
Attributing regulatory provisions to increase in loan loss reserves, Bhoumik said the reserves are likely to exceed 70 percent of gross NPAs from the current 66 per cent.
"Regulatory measures are forcing banks to improve loan loss reserves on restructured loans and exposures to corporate with large unheeded forex liabilities."
"The removal of provisioning forbearance on restructured accounts from FY16 will improve loan loss reserves further," the report said.
It said the Government's estimated equity injection of USD 23 billion till FY18 provides considerable rating stability for Government banks and comfort to senior creditors.
The larger private banks are expected to maintain their above-average capitalization levels based on better access to the equity capital markets, the report noted.
In a base case scenario, return on assets of government banks will continue to trend 15-20 basis points lower than the long-term average of 0.9 per cent, but still adequate to absorb rising credit costs without impacting capital for most banks, Bhoumik said.
He further said stressed assets may reach 14 percent of loans by March 2015 from 9 percent in March 2013.
"By then, improvement in industrial activity on the back of a gradual pick-up in the investment cycle could slow NPAs accretion and improve recoveries in most sectors," Bhoumik said.


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