Standard and Poor’s (S&P) rating agency said on Tuesday that while Indian banks appear to have learned lessons from the surge in bad loans, their governance and transparency are weak by global standards.
Failure to improve risk management and corporate governance in the coming growth cycle could produce a new crop of bitter loans. More monitoring of governance reforms is needed, especially for public sector banks, the rating agency said in a statement.
He released a report titled “As Indian Banks Grow Again, Will the Old Mistakes Return?” “.
The Reserve Bank of India (RBI) is tightening and equalizing standards for banking licenses, which will level the playing field, while raising overall standards.
Indian banks have become profitable again and have strengthened their capitalization, allowing a new phase of credit growth.
Stronger balance sheets and higher demand are expected to boost bank lending growth by more than 10% per year over the next two years. This would be in line with the nominal growth of the country’s gross domestic product (GDP).
“Barring another major coronavirus (COVID-19) outbreak in India, we expect the quality of bank assets to have bottomed out and will start to improve,” S&P said.
The system’s low loan ratio peaked at nearly 10 percent as of September 30, 2021. This ratio includes non-performing loans and restructured loans as a percentage of outstanding portfolio.
Credit costs – which reflect the provisioning of bad debts – will likely hit their lowest level in 7 years.
This in turn will increase income.
The rating agency said the economy’s expansion is expected to outpace that of peers in developing markets over the next few years. “By comparison, some tourism dependent countries, like Thailand, are likely to see long-term scars as we only expect a gradual recovery in travel-related industries,” S&P said.
Loan growth will be driven by retail credit, an underpenetrated segment for Indian banks. Demand for business loans could be slower to gain ground and be supported by working capital needs over the next year, the rating agency added.
Referring to corporate ownership in banks, S&P said “We remain skeptical about allowing corporate ownership in banks given India’s weak corporate governance.” Business ownership in banks increases the risk of intergroup lending, embezzlement and reputation exposure.
The RBI currently refrains from allowing business ownership in banks. The idea remains under study.
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