Mumbai, June 8: Standard & Poors (S&P) today said asset quality of the domestic banking sector was likely to improve this year because of the countrys sound economic growth, and this should translate into lower non-performing assets (NPAs).
However, the global rating agency cautioned that bank margins could see some compression this year because of rising funding costs.
Releasing its outlook for the banking sector in 2011-12, S&Ps credit analyst Geeta Chugh said, We believe the asset quality of Indian banks will improve in view of Indias sound economic growth and reasonable leverage. Banks focus on low-to-moderate risk segments and the increased diversification in their loan portfolios should also help their asset quality…We expect the sectors overall non-performing loan ratio to have peaked at about 2.6 per cent in 2010-11 and decline to 2.4 per cent in 2011-12.
The fourth quarter results of 2011-12 showed many banks, particularly belonging to the PSU pack, showing a rise in their bad loans. For instance, the gross NPAs of the State Bank of India rose from 3.05 per cent as on March 31, 2010, to 3.28 per cent as on March 31 this year. In absolute terms, the gross NPAs of the countrys largest bank went up to Rs 25,326 crore (Rs 19,535 crore).
Chugh said loans to infrastructure, metals and mining were likely to lead the increase in credit growth this fiscal. S&P expects around 20 per cent credit growth in the banking sector.
S&Ps article India Banking Outlook 2011: Stability Ahead, But Some Headwinds Remain said though the outlook for Indian banks was stable for this fiscal and the sector was likely to grow at a higher rate in the next two to three years, high inflation, increased competition, and evolving risk management processes would emerge as key challenges.