Banks’ stressed assets likely to improve only marginally: Fitch

Indian banks’ stressed assets are likely to have peaked this fiscal year, but the process of recovery is likely to be slow, said Fitch Ratings.

This observation comes on the heels of credit rating agency Moody’s changing its outlook for India’s banking system to stable from negative due to an improvement in the operating environment for banks.

Fitch expects Indian banks’ stressed assets ratio to improve, after reaching a high of 11.1 per cent in FY15, but only marginally to around 10.9 per cent 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 per cent in FY16 and FY17, respectively,” the credit rating agency said.

The Reserve Bank of India’s more accommodative monetary policy stance since January 2015 should also help 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’.”

Three concerns Fitch made a note of three points. First, State-run banks account for 90 per cent of the stressed assets and their ability to withstand even moderate amounts of stress is low, even as most face some degree of core capital impairment in Fitch’s updated stress test. Around 60 per cent of the NPLs have been overdue for over a year, and banks are increasingly resorting to write-offs and NPL sales to reduce their NPL stock. The rating agency expects this trend to continue.

Second, some sectors such as infrastructure and steel (accounting for 20 per cent of total loans and 40 per cent 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 to the recovery process remain in place, especially in the infrastructure and power sectors.

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