Indian banks' stressed assets are likely to have peaked this fiscal year, but the process of recovery is likely to be slow, says Fitch Ratings in a report.

The rating agency expects Indian banks' stressed assets ratio to improve after reaching a high of 11.1% in FY15 (to end-March 2016, but only marginally to around 10.9% in FY16. “NPL (non-performing loans) formation should be held back by a pick-up in GDP growth, which we forecast to reach 7.8 per cent and 8.0 per cent in FY16 and FY17, respectively,” Fitch said.

The Reserve Bank of India's more accommodative monetary policy stance since January 2015 should also help to boost credit demand and aid the recovery in banks' asset quality.

According to Fitch, “Asset quality is likely to remain an issue for the sector for some time despite some evidence of 'green shoots'.

Noting three points, Fitch said, First, state banks account for 90% of the stressed assets and their ability to withstand even moderate amounts of stress is low, while most face some degree of core capital impairment in Fitch's updated stress test. However, around 60% of the NPLs have been overdue for over a year, and are increasingly resorting to write-offs and NPL sales to reduce their NPL stock. We expect this trend to continue, the report said.

Second, some sectors such as infrastructure and steel (account for 20% of total loans and 40% of total stressed loans) remain high risk, saddled with high corporate leverage and weak debt-servicing ability, despite the improving macroeconomic environment.

Third, slow progress on stalled projects suggests risks remain to the recovery process, especially in the infrastructure and power sector where corporate leverage and weaker cash flows compound challenges for firms. Clearing stalled projects will be essential to reviving private-sector confidence and stimulating capital formation, the Fitch report said.

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