India Ratings today gave a "stable" outlook for the country's banking sector, but said lenders may face funding issues which will make passing on of lower interest rates untenable.
The funding issues will arise from the asset liability mismatches, wherein banks are carrying low tenor deposits and lending for longer duration, and due to migration to the Basel-III regulations, which require USD 45 billion by FY'18, India Ratings Senior Director Ananda Bhoumik said here today.
Bhoumik said the banks face a "conundrum", wherein they will not be in a position to lower interest rates even if the RBI eases its policy rates.
A cut in deposit rates, which is a precursor to softening of the high lending rates, coupled with inflation staying elevated, will result in a further reduction in real interest rates and hurt the deposit rates, he said.
"From a policy perspective, the transmission of any monetary easing during 2013-14 may be diluted due to the twin impact of higher refinancing pressures on banks and slower deposit accruals in a low real interest rate regime," he said.
Bhoumik added that refinancing risk is rising majorly, especially for the state run banks and said that teh ratio of total deposits and borrowings maturing in a year are standing at an all time high of 20 percent of the total assets for the public sector banks.
The continued support being rendered by the government is a positive for the banks and underlined the need to allow them to issue infrastructure bonds, as is being mooted at present. Additionally, some banks are also tweaking their deposit profiles, he said.
Other positives which will work for the banking sector include a likely stabilisation on asset quality concerns by mid-2013, Bhoumik said.
The report from India Ratings, formerly Fitch Ratings, comes within a day of its international peer Moody's and S&P giving the domestic banking sector a "negative" outlook.
The gross NPAs (Non-Performing Assets) for the system will peak at the 4-4.2 per cent levels by June and will either stabilise or fall then afterwards, Bhoumik said, adding liquidity and funding will dominate the discourse this year.
However, he said, one should not expect a dramatic improvement on the NPA front and it will be a while before the gross NPAs reach the pre-2008 crisis levels of under 3 per cent.
Another positive which will work for the sector is the overall compliance to the stricter Basel-III capital regulations and the government's commitment to