Bank recapitalisation unlikely to deliver much: S&P
The overall improvement in asset quality will take a few more years, says S&P.
It can be noted that fixed capital formation by the corporates, which indicates the investment to create durable assets, has been lagging far behind historical averages for almost a decade now, leading to poor overall credit demand across industries.
The overall improvement in asset quality will take a few more years and significantly hinges on the resolution of large NPAs, global rating agency S&P said in a note Tuesday while assessing the impact of the Rs 70,ooo-crore upfront capital infusion into state-run banks announced last Friday.
"Fragile financial markets, rising risk aversion, and weakness in some highly leveraged corporate sectors will continue to stress the asset quality and growth," the agency said, adding the key to banking recovery is the resolution of legacy weak assets.
"We expect the spurt in corporate defaults to be offset by recoveries of existing NPAs referred to the bankruptcy tribunals. But corporate and finance companies stress will lengthen the recovery period, and we expect only a gradual "u-shaped" recovery," the report added.
Banks' credit growth is likely to be in line with the nominal GDP growth, while their earnings will at best be marginal and system wide will remain weak.
"Improvement will be due to a decline in provisions, lower incremental slippages, recoveries from existing NPAs, and higher provisioning coverage," the note said.
The report, however, said the plan to immediately infuse Rs 70,000 crore at one go will help replenish the depleted capital base of public sector banks.
The government expects the move to lead to an incremental lending of around Rs 5 trillion and help revive the bleeding banks.
"This round of capital infusion will help banks make necessary haircuts on their stressed corporate loans and shore up their regulatory capital adequacy," it said, and warned that unless banks substantially improve their risk management capabilities, the need for capital will recur.