A meaningful proportion of stressed loans have already been recognized as impaired, while economic conditions are improving.
Moody's said the capital levels, however, are low for public-sector banks (PSBs). Such banks exhibit common equity Tier 1 ratios of only 6%-10%, and their coverage of non-performing loans with loan-loss reserves averages 55 per cent. By contrast, high capital levels are credit strength of the private-sector banks that Moody's rates.
ICRA said over the next 12-18 months, the credit profile of PSBs will be driven by their ability to reduce stress on assets, improve earnings and shore up capital. The state-owned banks reported some moderation in their bad-loan ratios during the first six months of the financial year ended 31 March 2015 (FY 2015). But, their holdings of weak standard assets represented 2.0-2.5 times their total gross non-performing assets. Nevertheless, of these weak assets, only 25-30 were classified as stressed, ICRA said.
The credit provisioning by public-sector banks will remain elevated over the next 12-18 months, given that reported net non-performing assets totaled 3% of advances, and such banks' high levels of weak assets.
As for private-sector banks, ICRA said their credit profiles remain superior to that of their public-sector counterparts. This is due to the better asset quality, earnings and capitalisation that the private-sector banks exhibit.
While some large private banks may demonstrate significant exposures to vulnerable sectors, their better profitability and capitalisation levels are likely to limit the impact of asset stress on their credit profiles.