New Delhi: Global credit rating agency Fitch Ratings on 20 August cautioned Indian banks that rising interest rates and expanding credit could increase their non-performing assets.
“While the benign credit cycle helped support improved performance, the rising interest rate cycle together with rapid loan growth have now exposed banks to growing non- performing loans (NPLs),” Fitch said in a report titled ‘Indian Banking System´.
The agency said banks may also find it difficult to maintain the profitability even as rising interest rates start to affect the borrower’s repayment capacity.
Vulnerable asset categories, including unsecured consumer loans, capital market exposure and real estate lending, however, form less than 10% of total loans, it noted.
Fitch said the median net NPA or equity ratio, which was less than 10% in 2006-07, is therefore unlikely to rise sharply.
However, the rating agency said the strong domestic franchise and reach of large banks have helped them exploit growth opportunities in a rapidly expanding economy.
Going forward, banks would remain the dominant financial intermediary in an economy characterised by relatively low credit penetration, it said, adding that the percentage of bank loans to GDP stood around 50% in 2006-07.
The rating outlook for the sector remains stable as banks have effected structural improvements in their risk management capabilities and raised capital from the buoyant domestic and international capital markets.