Global rating agency Standard & Poor’s on Monday said 2014 will continue to be a challenging year for the asset quality and profitability of the country’s banks as the economy is expected to make a tepid recovery.

“The growth, profitability and asset quality of Indian banks are likely to remain subdued in the next 12 months despite a likely uptick in economic growth,” the agency said in a note.

The ongoing weakness in asset quality of banks will persist for 12 months as the economic recovery is “likely to be tepid,” according to S&P credit analyst Amit Pandey.

“It will take time before the domestic industry improves and the balance sheets get de-leveraged, which are two of the most important factors determining the asset quality for banks,” he added.

In its financial stability report released on December 30, the Reserve Bank of India estimated that gross non-performing assets in the system will rise to 4.6 per cent by September 2014 from 4.2 per cent in September 2013, before ending at 4.4 per cent in March 2015.

Among all banks, the RBI expects state-run banks to be the bad performers.

On the capital scenario for lenders, the rating agency said banks will need “sizable” capital to support credit growth and comply with the stringent Basel-III norms.

It said private sector lenders rated by it are better placed to meet the requirements than state-run ones.

“Public sector banks will have to rely on a combination of government capital infusion and equity markets to support their capitalisation,” it said.

The government has allocated Rs. 14,000 crore for capital infusion in banks for this financial year.

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