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View from India: FY 2019 can be a defining year for Indian banking

Fiscal 2019 is predicted to be a defining year for Indian banking, characterised by credit growth and steady operating profitability, as a new process for dealing with stressed assets comes into effect.

The non-performing assets (NPA) ratio, which was 9.4 per cent in March 2017, is estimated to have reached 10.5 per cent in March 2018 and is predicted to go up to 11 per cent in 2019. These forecasts are based on the Reserve Bank of India (RBI) revised framework for offering a resolution for large stressed assets. RBI is India's central banking institution, which controls the monetary policy of the rupee.

The RBI’s revised framework, which was officially announced in February 2018, is expected to result in transparency, credibility, and efficiency through structural streamlining, standardising and harmonising the resolution process. By mandating weekly information on large delinquent accounts, directing that a resolution plan be worked on immediately on default, and setting stringent timelines (180 days from default) for referring an account to the Insolvency and Bankruptcy Code (IBC) process, the RBI is establishing an ecosystem where stressed assets would get recognised on time and their resolutions would be quicker than before.

These are some of the highlights of the CRISIL Ratings Media Teleconference held on 2 April 2018, which offered a round-up of the rating actions during FY2017-18 and the outlook for 2018-19.

As of 31 March 2017, the banking sector has been weighed down by sizeable stressed assets, which is to the tune of Rs 11.5 lakh crore (INR11.5tn, £125bn) or 14 per cent of bank advances. 

Other highlights follow. “Exports-related sectors should also benefit from strengthening global growth and ironing out of Goods and Services (GST) issues. Also, a budgetary fillip to rural consumption and implementation of the Seventh Pay Commission recommendations at the state level will strengthen consumption demand. Hence, consumption-related sectors are expected to benefit,” said Krishnan Sitaraman, senior director, CRISIL Ratings.

It is hoped that consumption-based sectors will open out newer investment opportunities. Sectors such as pharmaceuticals, agricultural products, auto components and packaged foods which are associated with consumption will drive upgrades. However, investment-linked sectors such as real estate and independent power producers, especially thermal, are slated to lead to downgrades because of a rather subdued demand outlook.

Overall, the corporate credit quality is expected to improve and sustain in fiscal 2019 as the domestic and global demand is expected to improve, and the transitory impact of Demonetisation and GST will fade out. In fact the credit profiles of many companies have gone up because of healthier financial risk profiles. Other factors include the absence of debt-funded capital expenditure (Capex) and capital infusion, which has happened through unsecured loans from promoters. Equities have also helped bolster the balance sheets. 

The downgrade rate of 5.9 per cent in fiscal 2018 is the lowest recorded in the past five fiscals, indicating a sustained recovery in credit quality, which helps the credit ratio sustain well above 1 time for the fourth consecutive fiscal.

Like in the past few years, India Inc’s credit landscape continues to be a tale of two distinct loan books. Obviously, one is good and the other bad. The latter is due to stressed assets that loom large over the banking sector. This trend is likely to change after 2020 because stressed assets are expected to get the much-required respite with RBI’s revised framework. CRISIL expects resolution of stressed assets to provide much-needed respite from fiscal 2019 onwards and the stock of gross non-performing assets (GNPAs) to peak.

Looking at the good side of the loan book, the number of upgrades versus downgrades is 1.45 times in the second half of fiscal 2018. Agreeably it has moderated from the levels seen in the first half, but the loan book has improved. For instance there were 1,402 upgrades compared to 839 downgrades in fiscal 2018.

“Upgrades outnumbered downgrades in the good loan book on the back of better financial indicators due to lower capital expenditure (capex) and record equity issuances. Continued headroom in capacity utilisation across sectors made corporates go slow on capex, even as India Inc raised a record Rs 1.75 lakh crore (£19bn) of equity in the ten months ended 31 January 2018,” said Somasekhar Vemuri, senior director, CRISIL Ratings. CRISIL is India’s foremost provider of ratings, data, research, analytics and solutions.

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