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The outlook for the Indian banking sector is stable, said Fitch in its ‘Outlook of Asia Pacific banks'.
However, the challenges faced by the Indian banks would be more severe than what was faced in the 2008 crisis, it said.
Fitch's conclusion is based on the premise of India's domestic economy recovering in 2012 and the government's commitment to maintain a minimum Tier-1 capital of eight per cent in PSU banks.
The rating agency, however, cautioned that weakening asset quality and credit concentration build up were putting pressure on the downside.
With borrowers hit hard by increasing raw material prices, slowing demand, hardening interest rates and the depreciating rupee, non-performing assets (NPA) are expected to increase, said Fitch.
Restructured loans would nearly double from the 4.4 per cent clocked during 2008 to 7-8 per cent of the banking sector's loan portfolio.
Fitch expects PSU bank profits to erode by 15-20 per cent, return on equity to dip below 15 per cent and return on assets to less than one per cent by FY12 if infrastructure portfolios turn NPA, making net interest margins volatile.
The timeliness of the government's equity infusion is critical. However, Fitch pointed out, the Centre is grappling with fiscal deficit on the one hand and a proposal to capitalise PSU banks over 10 years on the other.
Fitch said a sustained economic weakness would deteriorate asset quality, hurt viability ratings and change the outlook on India's banking sector.
> raghavendrarao.k@thehindu.co.in
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