The domestic banking sector is unlikely to recover in the next 18-24 months due to slow economic growth and deteriorating loan portfolio, said a report by global rating agency Standard & Poor’s.

“We base our view on slow economic growth that is constraining the corporate sector, the chief recipient of banking credit,” the report, titled ‘Slack economic growth dents recovery prospects for Indian banks’, said.

Deteriorating asset quality and earnings are likely to constrain the credit profiles of Indian banks over the next two years, it said.

“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,” it said.

The report expects the banking sector’s non-performing assets (NPA) ratio to surge to 3.9 per cent of total loans in 2003-14 and to 4.4 per cent in 2014-15, compared with 3.4 per cent in fiscal 2012-13.

The return on assets should also remain depressed, at about 0.9 per cent, it said.

Banks have restructured 5.7 per cent of their aggregate loan balances as of March 31, 2013. The Reserve Bank of India allows banks to exclude these loans from their reported NPAs until 2014-15.

“We expect restructuring to remain high in the next two years because of the weak economy and the regulatory allowance,” it said.

S&P has revised its forecast for India’s GDP growth to 5.5 per cent for 2013-14 from 6 per cent.

“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.

“We believe that the infrastructure (power and road), metals and mining, construction, and capital goods sectors are particularly at risk,” it said.