Gross NPA ratio of Indian banks rose to a 14-year high of 9.1% in September 2016

Poor banking sector profitability looms over the next months.

The outlook for Indian banks remains poor over the coming months, and analysts at BMI Research believe that weak corporate balance sheets and the effects of demonetisation will contribute to further increases in non-performing assets (NPAs) over the coming months.

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Indeed, according to the Reserve Bank of India (RBI), the gross NPA ratio of Scheduled Commercial Banks (SCBs) remains on an uptrend, rising to a 14-year high of 9.1% in September 2016 (versus 7.8% in April 2016).

Corporate balance sheets remain poor in the basic metals and construction industries, and steel companies face a combination of low prices and high leverage rates, which will likely contribute to further increases in NPAs in the near term.

In addition, following the government's demonetisation move, loan payment collection has taken a backseat as the RBI's announcement of a 60-day extension on NPA recognition has been reported to be misinterpreted among many borrowers as a moratorium on their loan repayments.

Continued increases in risk provisions and loan-write offs will therefore also result in poor banking sector profitability over the coming months.