India’s banking sector faces the threat of rising defaults and bad loans as gross domestic product growth has plunged to a six-year low of 5% and most industries registering weak or negative growth.

Jefferies Group has stated in its latest sector report that the country’s premier banks, including Bank of Baroda, Axis Bank, ICICI Bank, and State Bank of India could be staring at a wave of non-performing assets, especially in the telecom and construction sector.

The brokerage claims there is a divergence between the credit rating assigned and the financial health of the corresponding corporate entity, Business Standard reports.

In a note on Indian banks and financial institutions co-authored by Nilanjan Karfa and Harshit Toshniwal, Jefferies said YES Bank, Bank of Baroda, SBI, IndusInd Bank, and RBL Bank are most prone to “high risk” emanating from Anil Ambani’s Reliance Group, travel company Cox & Kings, power generation equipment company CG Power, housing finance company Dewan Housing Finance Ltd and Essar Shipping.

Slow loan resolution

Meanwhile, another report by India Ratings says the slower pace of resolution of bad loans will badly affect the banks, especially the state-owned ones. They are staring at a spike in their credit cost for the second half of the current fiscal year.

The report has revised upwards the credit cost estimate for state-run banks by 30 basis points to 5.2%, while for private sector banks it is pegged at 3.2% – the same level as the previous estimate.

The agency said the material incremental generation of bad loans for fiscal 2020 and 2021 may come from the agriculture and micro, small and medium enterprises.

The report said that muted rural income growth, along with announcements or expectations of farm loan waivers could weigh on the asset quality of farm loans.

With the government telling state-owned banks to be more proactive in disbursing credit to small industrial units until March 2020, in order to boost the economy, some of the incremental stress in this segment can show up in the 2021 fiscal year, unless the economy picks up, the report said.

Four-fold rise

During the 2014 election campaign, the Bharatiya Janata Party promised to bring down bad loans in the banking sector.

However, gross non-performing assets in the banking sector have seen nearly a four-fold increase in the five years since the Narendra Modi-led NDA government came to power.

According to data compiled by the Reserve Bank of India, system-wide gross non-performing assets of banks have gone up from 3.8% of gross advances or 2.63 trillion rupees (US$36.96 billion) on March 31, 2014, to 11.3% or 10.39 trillion rupees ($146 billion) as of March 31, 2018.

The problem is more acute among state-owned banks. The bad loans managed by these banks increased from 2.27 trillion rupees ($31.9 billion) or 4.4% in FY14 to 8.95 trillion rupees ($123 billion) or 14.6% at the end of FY18.

The country’s largest lender, the State Bank of India alone accounted for nearly 2.23 trillion rupees (over $31 billion) of bad loans in 2018.