Unseasonal rains could impact banks' profitability, says India Ratings

Untimely hail and rain in March 2015 could impact the banks ' asset quality in agricultural loans, says India Ratings and Research.

The nonperforming loan (NPL) ratio of the agri-loan portfolio could double for some banks, though the reduction of overall return on asset may be muted at between 4 basis points to 6 basis points (about 10% of the profitability of government banks).

According to the rating agency, it is estimated that system-wide agricultural non-performing assets as a percentage of total agricultural advances will rise to 16.9 per cent by 2015-16 from 13 per cent in 2013-14 as a direct result of the unseasonal rains.

As a result, gross NPL ratio (on total advances) for the banking system will increase by 40 basis points. This will translate into a profitability impact of 2 basis points to 3 basis points on system-wide post tax return on assets.

Stressed assets in Indian banks amounted to 10.6 per cent of total credit at end of December 2014.

The agency earlier estimated this to grow to 13 per cent by the end of March 2016. The untimely rains could increase this to 13.4 per cent.

India Ratings also expects that the profitability impact to be felt in the second half of 2015-16.

Governmental support through subsidies may not significantly benefit banks as the amount of support (Rs 2,500 per acre) to be provided is marginal compared with the extent of the losses (Rs 20,000 per acre).

Also, it is unlikely that the support money will be used by impacted farmers to repay bank loans.