Is India's banking sector nearing recovery?

Operating conditions for banks have been improving.

Revival in private sector investments and credit growth, and a reversal in the trend of rising nonperforming loan ratios for India's banks is likely to take time.

According to a release from Standard & Poor's Ratings Services, this is despite improving operating conditions for banks because of a reform-minded  government and an increased elbow room for the central bank to lower interest rates.

That observation is according to a report, titled "Despite India's Brighter Economic  Prospects, A Banking Revival Is Still A Way Off," that Standard & Poor's Ratings Services published recently.

"We expect the pace of growth of stressed assets to fall because a substantial  part of the stress has already been recognized," said Standard & Poor's credit analyst Amit Pandey.

"Any material recovery of corporate loan quality will require improvement in demand in India, deleveraging of corporate balance  sheets, and resolution of problems in the infrastructure and metal and mining  sectors, all of which will take a while."

Here's more from Standard & Poor's Ratings Services:

Capitalization is a key constraint for some public sector banks in India, the  report notes. We believe that rated private sector banks are better placed  than their public sector peers to meet Basel III capital requirements.

The recent budget allocates only Indian rupee 79.4 billion for infusion into banks  in fiscal 2016 (year ending March 31, 2016). Public sector banks will therefore have to raise additional capital through additional Tier 1 hybrid  instruments, equity markets, and state-owned Life Insurance Corp.

Standard & Poor's estimates that credit growth in India's banking sector will  improve to 12%-13% in fiscal 2016 (year ending March 31, 2016) from less than 10% in the second half of calendar year 2014.

The current government has promised development and good governance, and a lot will depend on its ability to keep its promises and improve the economy, the report notes.

"We expect the profitability of Indian public sector banks to remain weak, and banks' credit costs to remain elevated," said Mr. Pandey. That's because of  underprovisioning for nonperforming loans, slippages from standard restructured loans, and a higher provisioning requirement for fresh  restructured loans effective April 2015.

Prolonged weakness in asset quality of Indian banks could lead us to assess that economic risk, a key factor in our Banking Industry Country Risk  Assessment and ratings on banks, has increased. The stand-alone credit  profiles and ratings on some public sector Indian banks are sensitive to  deterioration in their asset quality and erosion in capital and earnings.