Indian banks are likely to reduce lending rates further, after having cut base lending rates by 70-90 basis points (bps) in the past few quarters, according to S&P Global Ratings.
However, it said credit growth in India has fallen sharply, reflecting weak corporate credit demand as well as capital challenges that most public sector banks are facing.
The global rating agency expects loan growth in India’s banking sector to be between 11 and 13 per cent in fiscal 2017.
“We anticipate that corporate capital spending will be weak, given low capacity utilization and high leverage in certain sectors.”
Banks in India and China will continue to face pressures on their asset quality, profitability, and capitalization over the next 12-24 months, according to the report. China’s credit growth has also been on a downward trend, the report notes.
However, S&P Global Ratings believes that slower credit growth is necessary to support long-term macro economic stability in China.
Interest-rate liberalization and deepening debt capital markets in India could weaken the banking sector’s net interest margin (NIM) in India, according to the report.
Likewise, China’s financial reforms, local government debt swaps, and deepening domestic debt capital market will shrink bank profitability and asset yield.
“We believe that NIMs will compress for Indian banks with corporate focus and higher bad loans, said S&P Global Ratings credit analyst Amit Pandey. “Continuing high credit costs will also limit any meaningful improvement in profitability.”
“We expect economic risks to remain high for Indian and Chinese banks, which will constrain their credit profiles,” said S&P Global Ratings credit analyst Geeta Chugh. “India’s economic risk trend is negative. Prolonged weakness in the asset quality of Indian banks could lead us to assess that economic risks have increased,” Ms. Chugh said.
S&P Global Ratings anticipates that nonperforming loan ratios of Indian banks with high exposure to companies in troubled sectors will continue to rise.
For Chinese banks, continuing weak cash flows for companies are likely to worsen asset quality for lenders.
The report compares banks in these two countries on parameters such as asset quality, profitability, capitalization, and credit growth.
The asset quality for Indian and Chinese banks is likely to remain under pressure due to slow industrial recovery in India and overcapacity in many Chinese industries, Ms. Chugh said.