New Delhi: The asset quality of banks in the four-nation BRIC group, including India, may come under pressure over the next 12-24 months due to a slowdown in economic growth, global credit rating agency Standard & Poor's said, but added that the lenders' ties with the government will support their credit profiles.
"We believe the asset quality of Indian banks is likely to deteriorate due to the moderation in economic activity, high inflation, high interest rates, and rupee depreciation," Geeta Chugh, credit analyst at S&P, said Wednesday in a report titled "Government Support Should Enable BRIC Banks To Ward Off Economic Headwinds". The other members of BRIC are Brazil, Russia and China.
India's gross domestic production (GDP) grew at a nine-year low of 5.3% in the March quarter, while interest rates remain high in the country due to monetary tightening by the Reserve Bank of India to control inflation.
However, state ownership and control of a significant part of the banking industry in BRIC countries is a critical rating factor to avoid huge shocks, Chugh said.
India's public sector banks, including the country's largest lender State Bank of India, account for almost three-fourths of the aggregate deposits and credit in the Indian banking system, with the government as the majority shareholder in these banks.
"Such a link is integral to the economic model of these countries. We expect governments to step in to avoid any abrupt and unexpected deterioration in local banks' financial condition."
Indian state-run banks' non-performing assets (NPAs) were at 3.3% of advances in the financial year ended March 31, 2012 against 2.31% a year ago.
The Indian government is expected to provide Rs 145.88 billion for recapitalization of public sector banks in the current financial year 2012-13.
The agency further said that earnings of banks in India and Russia in 2012 are likely to be at levels similar to 2011, while that of banks in China and Brazil may decline.
Earlier April, S&P lowered its long term credit outlook on India to 'negative' from 'stable' due to the country's deteriorating economic growth, widening current account deficit and slow pace of fiscal reforms, but affirmed its long term rating at 'BBB-' albeit with a hint that the rating may be downgraded if the situation worsens.
Subsequently, the agency cut outlook on its long-term counterparty credit ratings on 11 major Indian public and private sector financial institutions, including State Bank of India.