Indian lenders could face bad loan challenge, Fitch report says

Indian lenders could face bad loan challenge, Fitch report says

Mumbai: Indian banks may see bad loans swell as interest rate increases this year failed to deter consumers from borrowing more, Fitch Ratings Ltd predicted in a report released on Wednesday.

Bad loans from defaults on home mortgages could rise if interest rate increases this year are followed by a decline in property prices, the credit assessor said. About half of the loans to individuals are to buy homes, the prices for which have doubled over the past two years in south Mumbai, according to Cushman & Wakefield Inc.

“Consumer loans typically carry higher risk and delinquencies would depend on underwriting standards of individual banks," said Vishal Goyal, an analyst with Edelweiss Capital Ltd. “It is not a concern at this point in time because banks are anyway charging higher risk spreads on such loans."

India’s bank lending rates rose this year after the Reserve Bank of India raised the cost of borrowing to contain inflation fuelled by real estate purchases that were funded with loans. ICICI Bank Ltd, the nation’s second biggest lender, and HDFC Bank Ltd underwrote 33% more loans in the three months to 30 September, while loans by State Bank of India, the biggest player, grew 26%, compared with a year earlier. “The need to access capital may come into sharper focus if the credit cycle deteriorates," the Fitch report said.

Indian banks may find it more expensive to raise capital overseas, with rising rates prompting some to delay borrowings, the report added.

The need to raise capital “could well provide an impetus for consolidation" among banks, it said.

Still, banks would continue to benefit from rising credit demand as companies invest further to gain from a growing economy, Fitch reported.

India’s $906 billion (Rs35.70 trillion) economy will probably post its third year of at least 9% growth in the year to 31 March. Housing Development Finance Corp. Ltd (HDFC), which is 12.6% owned by Citigroup Inc., posted a decline in bad debt, and expects to meet its annual loan target of 25%, chairman Deepak Parekh said.

The strengthening of the rupee against the dollar could hurt smaller textile exporters, Fitch said in the report. The local currency is headed for the biggest annual gain since 1974, increasing by more than 12% this year against the dollar, data compiled by Bloomberg showed. Bloomberg