Global rating agency Standard & Poor's (S&P), in its report titled ‘India Banking Outlook 2014: Little Respite In Sight’, underscored that Year 2014 would continue to be a challenging year for the asset quality and profitability of the country’s banks as the economy is expected to make a tepid recovery, and that would take time for the domestic industry to recover and corporate balance sheet leverage to decline.
Further, the rating agency highlighted that simultaneous equity issuances by many Indian banks and negative sentiment on emerging markets could pose challenges for raising capital, evident in State Bank of India’s recent equity-raising, which had to be aided by government-owned Life Insurance Corporation of India (LIC).
The report noted that Indian banks will need sizeable capital to support growth and meet Basel III requirements. It, however mentioned that private sector banks were better placed than their public-sector peers in terms of meeting Basel III capital requirements, with the later having the need to rely on a combination of government capital infusion and equity markets to support their capitalization.
Referring to health of bank loans, rating agency reported that the asset quality was expected to remain weak due to slow economic growth, elevated interest rates, and high leverage of companies in distressed sectors.
In its financial stability report released on December 30, 2014, the Reserve Bank of India estimated that gross non-performing assets in the system will rise to 4.6 percent by September 2014 from 4.2 percent in September 2013, before ending at 4.4 percent in March 2015. Among all banks, the RBI expects state-run banks to be the bad performers.