Ashram Raja, the incoming governor of the Reserve Bank of India, was dealt an early blow after global rating agency Standard & Poor’s said on Monday that the nation's banking sector will likely languish for the next two years.
Slow economic growth and deteriorating loan portfolios continue to weigh on India's banks, Standard & Poor's said in a report called "Slack Economic Growth Dents Recovery Prospects For Indian Banks."
"We base our view on slow economic growth that is constraining the corporate sector, the chief recipient of banking credit," the report said.
S&P revised its forecast for India’s GDP growth to 5.5 percent in 2014, down from its original 6 percent forecast, which would be the country's lowest GDP growth rate in eight years.
"We no longer expect the corporate sector to mildly recover in fiscal 2014, given slower-than-expected GDP growth, heightened currency volatility, and high interest rates," the report said.
In addition to the demise of the rupee, which has lost 15 percent of its value since May, banks’ non-performing assets (NPA) appear set to grow from 3.9 percent of total loans in 2013-14 to 4.4 percent in 2014-15.
The report said that India's metals and mining, infrastructure, construction, and capital goods sectors are particularly at risk.
"The corporate sector's weak performance, combined with high interest rates and a weak rupee, is likely to weaken debt servicing for these companies," it said.