RATE HIKES TO AFFECT BANKS' PROFITS, ASSET QUALITY IN FY 2012: CRISIL

Significant increase in interest rates over the past 18 months will affect the asset quality and profitability of banks in India, according to credit rating agency Crisil.

Banks' gross non-performing assets (NPAs) ratio is expected to increase to nearly 3 per cent by March 31, 2012, from 2.3 per cent a year ago.

The pressure on asset quality is expected to arise primarily because of weakening debt-servicing ability of the corporate sector, especially the small and medium enterprises (SME) segment.

Banks' migration to system-based recognition of NPAs will also result in higher NPAs over the near term, the agency said.

Further, limited ability of banks to pass on further increases in funding costs to borrowers may result in a sharp decline in their return on assets (RoA) to below 1 per cent in 2011-12 for the first time in five years, Crisil said in a report. “The deterioration in asset quality will be driven primarily by slippages in banks' corporate and SME loans portfolios.

“This will be caused by increasing interest rates, high input prices, and an expected moderation in economic growth,” said Mr Pawan Agrawal, Director, Crisil Ratings.

As per the rating agency's assessment, sectors with weak demand-supply scenario, intense competition, and high leverage will be the most affected. Also, sustainability of demand across industries, such as cement, automotive, construction, and textiles, will need to be monitored. The uncertain global environment can add pressure on the export-driven sectors.

“In a scenario of prolonged high interest rates, banks' retail advances segment may also see some delinquencies over the medium term,” said Mr Agarwal.

Gross NPAs, in Crisil's view, will not significantly exceed 3 per cent per cent over the medium term. This is because, despite some challenges, it expects the Indian economy to grow at 7.7-8 per cent in 2011-12. Moreover, over the years, banks have strengthened their credit monitoring and collection mechanisms to mitigate delinquencies.

NIM and ROA

So far, banks have been passing on increases in funding cost to their borrowers and this has enabled them to maintain their net interest margin (NIM) at around 3 per cent. Consequently, they reported a healthy RoA of about 1.1 per cent in 2010-11, despite higher provisions for pension liabilities.

The rating agency said banks will have limited room to pass on any further increases in funding costs to borrowers. This will result in banks' NIM reducing to less than 3 per cent, and RoA dipping to around 0.95 per cent in 2011-12.

“Despite deterioration in banks' asset quality and pressures on profitability, their comfortable capitalisation covers asset-related risks,” said Mr Suman Chowdhury, Head, Crisil Ratings.

Banks' overall capital adequacy ratio was around 14 per cent as on March 31, 2011. Moreover, banks' capital coverage for net NPAs is expected to remain adequate, at nearly nine times, as on March 31, 2012.

SOURCE: http://www.thehindubusinessline.com/todays-paper/tp-money-banking/article2477306.ece