Banks' asset quality to remain under pressure this year: S&P

New Delhi: Indian banks' asset quality and capitalisation are likely to remain under pressure in the next 12 months mainly because of tepid industrial activity and high leverage by some corporates, Standard & Poor's said Tuesday.

"We expect profitability of Indian banks to decline over the next two to three quarters because banks recently cut base lending rates, and their credit costs are likely to remain high," S&P credit analyst Amit Pandey said.

He said the non-performing loans of banks with high exposure to troubled sectors will continue to rise, and credit costs of banks with a backlog of provisions will increase.

These factors could strain the capitalisation of banks with below-average profitability, particularly as capital demands are likely to soar as Basel III norms get implemented.

"The asset quality and capitalisation of India's banking sector is likely to remain under pressure in the next 12 months because of tepid domestic industrial activity, and subdued profitability and high leverage in some corporate sectors," S&P said in its report- Indian Banks Face An Uphill Road This Year.

It expects loan growth to be 11-13 percent in 2016-17 fiscal. The growth in retail loans will out pace corporate loans, in line with the trend over the past two years.

S&P expects banks' credit costs to remain high because of under provisioning on their existing gross NPAs, weak corporate performance, continuing slippages, RBI's review of banks' asset quality, and higher provisioning on strategic debt restructuring loans.

Banks have sizable capital needs to support growth and meet Basel III requirements, S&P said, adding private sector banks rated by it are better placed than their PSU peers on this front.

Most Indian public sector banks will have to rely on external capital infusion, given their reduced ability to generate internal capital, largely because of the pressure on asset quality in the past few years.

It said stand-alone credit profiles and ratings on some PSU banks could get lowered, given their weakening asset quality and capitalisation.