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Standard & Poor's warns on asset quality of Indian banks

Ratings agency Standard & Poor's (S&P) has said the quality of assets and earnings of banks in the emerging economies, especially India, is likely to weaken over the next 12-24 months.

BT Online Bureau   New Delhi     Last Updated: July 25, 2012  | 19:02 IST

Standard & Poor's (S&P), the global ratings agency, on Wednesday said the quality of assets and earnings of banks in the emerging economies, especially India, is likely to weaken over the next 12-24 months.

"We believe the asset quality of Indian banks is likely to deteriorate due to the moderation in economic activity, high inflation, high interest rates, and rupee depreciation," said Standard & Poor's credit analyst Geeta Chugh.

The S&P report said slowdown in growth in China and Brazil could also weaken the asset quality and earnings of banks in these countries.

"Small and midsize companies are particularly vulnerable. Stress is also mounting on some highly leveraged large companies," Chugh said.

The situation in Russia, however, is somewhat different.

Russia's banking industry, S&P's report said, is likely to continue its recovery from a severe recession in 2008-09 for at least the next two years.

The report did not cover South Africa, which is now a part of the grouping called BRICS.

In the report, 'Government Support Should Enable BRIC Banks To Ward Off Economic Headwinds', the ratings agency said the credit profiles the banks in these developing countries are unlikely to be affected because of their strong ties with the governments.

"Such a link is integral to the economic model of these countries. We expect governments to step in to avoid any abrupt and unexpected deterioration in local banks' financial condition," Chugh said in a statement.

"Government ownership and economic development policies link the credit ratings on the largest BRIC banks to government creditworthiness," she added.

According to the report, while asset quality in Brazil, China, and India is weakening, problem assets in Russia are declining from the peak of the recession despite credit risk in Russia remaining very high.

"Earnings of banks in China and Brazil could decline in 2012, but remain satisfactory. Returns in India and Russia in 2012 are likely to be at levels similar to 2011," it said.

Standard & Poor's said its rating outlook on the large banks in Brazil, Russia, and China is stable, reflecting its expectation that these countries will maintain their good economic resilience to a global slowdown and that their banking sectors will experience only a moderate deterioration in asset quality and earnings.

The negative outlook on the banks in India (BBB-/Negative/A-3) reflects the negative outlook on the sovereign rating.

With inputs from IANS

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