S&P expects turnaround in performance of Indian banking sector in FY20

22 Mar 2018 Evaluate

While pointing out the need to take more corrective steps to strengthen internal control system in public sector banks (PSBs), S&P Global Ratings in its latest report has said that Indian banking sector could witness a turnaround in the fiscal year 2019-20 (FY20). It also said that government has taken steps by splitting the post of Chairman and Managing Director but more need to be done. It added that the recent Rs 13,000 crore fraud at the Punjab National Bank (PNB) highlights the inherent weaknesses in the governance and transparency standards in the Indian banking system, especially among PSBs.

In a report titled ‘Will the global economic recovery lift banks in major emerging markets’, S&P expects the strengthened legal framework to accelerate recovery rates only in the next credit cycle. As banks clean up their balance sheets and provide for these weak loans, it expects the public sector banking to report losses for another year. It added that the large proposed recapitalisation of the public sector banking will help the banks make large haircuts on delinquent loans while still meeting the regulatory capital requirements.

Observing that the Indian PSBs are saddled with 13-15% of weak loans, though the reported non-performing assets (NPAs) are at 10.2% as of September 2017, the US-based agency said it expects Indian banks to accelerate bad loan recognition of the weak loans in the next few quarters. The resolution of these non-performing loans (NPLs) will gain momentum in fiscal 2018 under the new bankruptcy code. It added that fiscal 2019, akin to fiscal 2018, will be the year of rise in provisioning.

On India’s economy front, the report said that gross domestic product (GDP) growth is expected to increase to 7.6% in FY19 and 7.8% in FY20 as against 6.8% in FY18. As per the report, the fading impact of demonetisation and Goods and Services Tax (GST) implementation hurdles and continuing global recovery provide the stimuli to the country's trade and GDP growth. It further said that the banking sector's performance will get a boost from economic expansion and believes its deep protracted credit down cycle is nearing, with a turnaround by FY20.

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