India's banking sector is continuing to suffer under stress from bad debts amid weakness in the country's economy, analysts say.
"A lot of large corporates have seen stress," said Vaibhav Agrawal, the vice president of banking research at Angel Broking. "It's a mixture of the economy not doing well and the government creating a lot of problems in a lot of sectors including metals and mining."
Bans on some mines in the country have hit the industry, while "bottlenecks" in infrastructure projects are also affecting loans, with public sector banks being affected in particular.
"Clearly there are specific policy issues around land acquisition, environmental clearances, that need to be stepped up," said Mr Agrawal. "That is beginning to happen, but obviously there is a lot more to be done."
In a recent report from Fitch Ratings on the Indian banking sector, the ratings agency forecast that Indian banks' non-performing loans (NPLs) would increase through next month and beyond.
"Recent asset quality trends at both large and mid-sized government banks confirm our forecast that the Indian banking system's reported gross NPL ratio will rise close to 4.2 per cent for the year to March 2013," Fitch said.
"At the end of the first-half of the fiscal year to March 2013, gross NPLs in the 10 largest government banks rose by about 60 per cent from a year earlier," Fitch said. "These banks also account for the bulk of the NPL stock and restructured assets and are likely to see further pressure from the impact of slowdown in the next few quarters."
Moody's Investors Service has said that its outlook for the Indian banking sector remains negative for as long as the next 18 months.
"This environment is characterised by slow economic growth, high inflation, high interest rates and a weak local currency, and we expect these factors to lead to a further deterioration in asset quality, an increase in provisioning costs and a fall in profitability," said Vineet Gupta, a Moody's vice president and senior analyst. "And when we also consider the high level of loan growth, which at about 15 per cent annually, is expected to continue outstripping internal capital generation, then most of the Moody's-rated Indian banks will be challenged to maintain capitalisation levels at current levels, and some will even need to raise new capital externally."
Additionally, the number of restructured assets, which are not counted as NPLs, has also increased sharply. Moody's suggests that the reclassification of some loans as "restructured" is misleading.
"Loan classification and provisioning requirements mask the extent of the banks' asset quality and capital challenges," said Mr Gupta.
Uday Kotak, the managing director of Kotak Mahindra Bank, last week said that bad debts pose the biggest threats to banks. "The number one focus and concern for the system, the banking system, is rising bad loans," Mr Kotak told Bloomberg at the World Economic Forum in Davos.
"A lot of large corporates have got themselves overleveraged, and that's where the pain is."
Kamal Sen, the president and chief executive of the analytics and planning specialist Cogitaas, said that he believed the sector deserved a better rating.
"The problem is that many projects in the infrastructure sector have got delayed due to delays in government decisions and approvals, and banks have made large loans to the infrastructure sector," said Mr Sen. "However, the central government now has a mechanism for faster clearances by all ministries and therefore projects should take off faster."
Mr Agrawal said that there could be some respite for banks if the economy improved.
Banks were not on the verge of collapse, he added.
"There is no systemic issue. The capital adequacy ratio is relatively decent. The overall problem is there, but the core profitability from the net income interest et cetera is to an extent enough to absorb it. But clearly from a shareholder point of view, profitability is hit."
