Growth still possible for Indian banks

India’s embattled banking sector could report a growth of 14.5% in Q2 earnings despite mounting bad debts and debt rollovers.

Growth in their core net interest income component, however, will slow down to 13% with state-run banks reporting a drop to 9% and private lenders a much larger 22%, according to a report by brokerage Kotak Institutional Equities.

Kotak expects net interest margins to remain under pressure. Canara Bank, OBC, IndusInd Bank and Yes Bank may report expansion, having higher dependence on wholesale funds.

The report has a negative outlook on the key issue of asset quality. Corporate portfolio especially the SME and mid-corporate segments are expected to report higher asset quality problems while retail portfolios could see marginal rise in stress, however.

The banking sector’s bad asset books and the restructured books of banks are record highs this fiscal year. Gross non-performing assets book is close to 5% of total advances while the constant default rate is over 6% and the fear is that it may soon reach double digits.

Against this, gross NPAs in fiscal 2012 stood at just 2.9% while the CDR book constituted only 4.7% of the total. Kotak, however, is positive on the CDR outlook.