Indian banking sector's weakness deemed 'highly skewed' by analysts

As 80% of restructured loans are with small banks.

It has been noted that the performance of India's banking sector performance is "a study in contrasts."

According to a research note from BBVA, India’s banking sector performance over the past five years since the 2008-2009 Global Financial Crisis (GFC) reflects a contrasting picture depending upon bank ownership.

On the one hand, private sector Indian banks and foreign banks have exhibited profitability improvements, better asset quality trends, lower credit costs and healthy capital levels.

On the other hand, state owned public banks (PSU Banks) have been facing declining earnings growth, narrowing profit margins, significant deterioration in asset quality and elevated credit costs.

Here's more from BBVA:

Weakness in India’s banking sector is highly skewed, with bulk of the restructured loans (nearly 80%) sitting with small state owned banks, which have just 50% of the Indian banking system’s Tier -1 capital.

Notwithstanding the differences, in general for India’s banking system as a whole, profitability remains constrained due to rising credit costs given high level of impaired assets - which leads to the creation of higher loan loss reserves - , a sharp slowdown in incremental loan to deposits ratio and on-going cuts in lending rates by banks in response to RBI’s recent monetary policy easing.

Return of Assets (ROA) – a measure of bank profitability – of PSU banks is low, in the range of 0.7% to 1.0% and below 2% for private sector banks.