Bad loan worries of Indian banks not over yet: Fitch

Mumbai: The recent decline in bad loan levels across many state-run banks doesn’t indicate that asset quality woes for the Indian banking sector are over, global rating agency Fitch Ratings Inc. warned on Monday.

“The number of new loans becoming non-performing is still close to 3x the loans recovered and upgraded at the largest state banks at end-March 2014,” Fitch said in a release, adding that the economy remains weak and recovery continues to be slow.

“There is some evidence of higher recovery rates, but the write-downs and portfolio sell offs to asset reconstruction companies are likely to play a larger role in reducing reported NPLs (non performing loans),” the agency said.

Total gross non performing assets (NPAs) of India’s 40 listed banks stood at ₹ 2.42 trillion in the March quarter, as compared with ₹ 2.43 trillion in the preceding quarter, but about 36% higher compared with the year-ago period, according to data compiled from Capitaline.

This, coupled with the ₹ 6 trillion in restructured assets in the system, takes the total amount of stressed assets to ₹ 8.43 trillion or close to 14% of total bank loans, according to a Mint analysis.

“If the fall in reported NPLs was driven by an improvement in asset quality, we would expect a concurrent decline in the number of new NPLs as well as higher recovery rates in NPL workouts,” Fitch said.

To improve the health of Indian industries, the government is planning to push for faster clearances of delayed projects, while the Reserve Bank of India (RBI) recently revised its rules for early detection of bad assets in the banking system.

“The efforts to deal with reported NPLs may mean the peak in stressed assets could be lower than our earlier forecast of 15% by FY15,” Fitch said. “However, regardless of the reported number, the asset quality pressures will remain until there is a fall in new NPLs.”

According to the agency, state-owned banks, especially the mid-tier ones, are in a particularly difficult position due to their high share of stressed assets and weak capital and earnings positions.

“State-owned banks’ exposure to sensitive and structurally weak sectors is high, and we do not expect any dramatic recovery in the near-term, implying that we expect the asset quality challenges to remain in the foreseeable future,” Fitch said.

Further, state banks’ capital position is under pressure and sensitive to downside pressures in asset quality, especially where capital buffers are already weak, Fitch said.

However, the performance of large privately-owned banks is clearly better, backed by satisfactory asset quality, strong profitability and robust capitalisation, the agency said.