Ratings headache

Since the beginning of the cyclical slowdown in 2011, Indian banks have displayed a degree of resilience in the face of adversity, not discounting their much touted asset-liability mismatches or NPAs teetering on the verge of disaster. Fears of asset quality in the face of bad times are realistic, though not unexpected. Hence, S&P negative outlook on SBI and six other PSU banks must be viewed seriously from the point of view of deteriorating asset quality and falling credit risk profiles of the corporate sector. Asset quality concerns are likely to be further enlarged on GDP growth concerns and no real improvements evident in the fiscal and current account deficit numbers. The manufacturing sector is still roiled by global economic headwinds and its credit profile continues to be negative in the face of falling global demand.

The Bankex, a sensitive trading index for the banking sector, has picked up only marginally since last month’s CRR rate cut of 25 basis points by RBI, and more needs to be done to perk up investor sentiments. The CRR cut freed up monies into the sagging market at lower lending rates, but any meaningful effect on manufacturing, infrastructure and realty sectors where banks have strong credit plays will be visible only by end-October. That does not call for celebrations. And, as reported in this newspaper, bank deposit growth in the current fiscal has been hugely more impressive than credit growth because high lending rates continue to repel borrowers, thereby affecting bank advances. According to RBI data, between April 6 and September 21 this year, deposits surged Rs 1,95,839 crore, while credit rose just Rs 72,923 crore. This is no antidote to the malady of margin erosion. And, base rates of banks continue to be too high for comfort.

Banks need to act urgently on the spectre of more downgrades ahead. SBI and other PSU banks on S&P’s downgrade rollcall have to face the challenge of maintaining healthy growth in operating profits to deal with NPAs climbing uphill. The silver lining is that CASA (current account and savings account) deposits of most banks are on the satisfactory side and this will help them maintain margins to an extent. Meeting the expectations of ratings agencies should not be at the cost of exposure to small and medium businesses who will be key to an economic rebound – whenever that happens.