Chart of the Day: Indian banks' profitability crumbles as NPL ratios jump

Loan loss provisioning expenses will rise.

Public sector banks (PSBs) in India saw a sharp surge in non-performing loans after the Reserve Bank of India's mandated asset quality review.

According to a report by Moody's, the asset metrics of PSBs deteriorated sharply in the second half of FY2016. On an absolute basis, reported NPLs for the 11 rated banks more than doubled to INR4.1 trillion at the end of FY2016 from INR2.0 trillion at the end of FY2015.

"This development resulted in a significant rise in loan loss provisioning expenses. On a cumulative basis, these expenses consumed more than 100% of pre-provision income (PPI) for most banks, thereby adversely affecting overall profitability,” said Moody’s report.

The report noted that the mandated review has adversely affected the banks' profitability. Eight of the PSBs that Moody's rates posted a net loss for the full year, and the
other three reported a significant decline in profitability.

“We expect the capitalisation profile of the PSBs to further deteriorate, unless the government provides additional capital support. These banks' asset quality will remain under pressure over the next 12 months, as they continue to recognize NPLs from some of the larger leveraged corporate groups, particularly in the steel and power sectors. As a result, elevated provisioning expenses will continue to constrain profitability and limit internal capital generation,” Moody’s said.