Banking sector: What is the outlook?

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Banking sector: What is the outlook?

In an interview to CNBC-TV18, Pawan Agrawal, director, CRISIL Ratings and Rajiv Mehta, analyst, India Infoline, speak about the banking sector and give their outlook going forward.

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The banking sector has been facing a lot of problems like non-performing assets (NPA), exposure to sectors like aviation, power etc.

In an interview to CNBC-TV18, Pawan Agrawal, director, CRISIL Ratings and Rajiv Mehta, analyst, India Infoline, speak about the banking sector and give their outlook going forward.

Also read: Q3 earnings to be weak; pose downside risk, says Morgan Stanley

Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Reema Tendulkar. Also watch the accompanying videos.

Q: How much are you expecting the bad loan problem, in the aggregate, to grow by for the banking sector in the next 15 months, say up until March 31 FY13?

Agrawal: Our expectation is that we will now start to see reversal in the stable gross non-performing asset (NPA) position that we have been seeing for the banking sector over the past few years. We have already seen in the first six months that the gross NPAs have already increased.

They currently are at about 2.8% of the overall advances. Our expectation is that they should be around 3% by March 12. They should cross a little above 3% in March 13, should the economic environment remain a little more stable and we are expecting a growth of about 7-7.5% next year.

However, the vulnerabilities in the external environment still remain. Domestic economy also remains vulnerable to the lack of investment and high interest rates. Should that happen, it is likely that that figure can be higher. Our estimate at this stage is that March 12 the overall gross NPAs should be near Rs 1,50,000 crore.

Q: Do you have a number for March 13?

Agrawal: March 13, the scenario is still evolving. Our expectation is that they should remain stable at about 3-3.2%, should we see economic environment and growth and interest rate easing as is expected to happen. The situation can worsen and the numbers can be higher, if the growth trails down maybe below 7%, somewhere in 6.5-7% range.

Q: We have been talking about the stressed sectors- airline space or even the entire power space. Have you worked out any kind of numbers of how much the lender's exposure is potentially at risk in each of these individual sectors? Which banks perhaps are vulnerable?

Agrawal: On the power sector, we released a detailed study a couple of months ago. Should reforms do not happen over the next 12-18 months, our expectation is that nearly Rs 56,000 crore of loans that lenders - banks, specialised financial institutions and the infrastructure finance companies- have given. That represents about 12% of the overall loans that lenders have given to this sector. They are potentially at risk.

We have seen that some steps towards reforms have started to take place. Indeed two-three months is a short time for us to judge the efficacy of these reforms. But I think it is important that these reforms gather pace.

We see far higher progress on containing the distribution losses. We see far higher progress on charging of electricity rates which are consistent with the economic cost of supply. Should these two basic reforms do not happen, we are likely to see the exposure of lenders to be at risk.

In the aviation sector, the overall exposure of the banking system is estimated at about Rs 40,000-50,000. We are seeing that except one or two exceptions most of the airlines are making losses. High fuel prices are expected to continue. Therefore, we do not see the stress going away from the aviation sector either.