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Indian banks to see bad loans peaking post FY23: Fitch

Fitch estimates aggregate potential stressed loans to be highest among large state banks at 11.9% of loans, followed by mid-sized state banks at 9.3% (Photo: Mint)Premium
Fitch estimates aggregate potential stressed loans to be highest among large state banks at 11.9% of loans, followed by mid-sized state banks at 9.3% (Photo: Mint)

  • Fitch expects moderately worse 2021 outlook for Indian banks as it sees muted prospects for new business due to likely weak corporate and consumer confidence, banks' continuing high -risk aversion and below-trend credit demand

MUMBAI: Stressed loans of Indian banks will likely peak after fiscal 2023 as regulatory relief measures have postponed asset quality issues, according to Fitch Ratings. In a press release titled Indian Banks 2021 Report Card, the global rating agency said stress from small businesses and retail borrowers has not been fully accounted for by the lenders which resulted in the impaired loan ratio of banks coming lower at 7.5% in fiscal 2021.

“Continued relief measures aimed at Covid-19 affected segments (such as micro, small and medium enterprises (MSME), retail and contact services) played a crucial role in deferring recognition of problems with asset quality. Fitch expects impaired loans to peak after FY23 since stress is likely to manifest from this pool over a fairly protracted timeframe," said the release.

According to Fitch, the regulatory moratorium, Covid-19 specific restructuring, and state guaranteed refinance for MSMEs account for around 10% plus of system loans. The rating agency also said the suppression of bad loans will continue in the current fiscal in the wake of new measures to deal with the impact of the second wave of the pandemic.

Fitch also said it expects banks' exposure to stressed MSME and retail borrowers to rise further with the increasing relief outlay. It also added that it is likely to compel banks, especially state -owned ones, to slow regular lending in the absence of adequate core capital cushions and weak contingency buffer

The global rating agency estimates aggregate potential stressed loans to be highest among large state banks at 11.9% of loans, followed by mid-sized state banks at 9.3%, after factoring in total exposure to MSMEs that have availed ECLGS, based on available bank disclosures .

“Most private banks have significantly lower impaired loans and a higher share of state -guaranteed ECLGS loans (2. 2%) than state banks (1. 2%) in FY21, but they also have more retail loans. We consider MSME and retail loans especially unsecured and loans to low and moderate income borrowers to be most at risk , although retail loan s have performed better than our expectations so far," it said.

Fitch expects moderately worse 2021 outlook for Indian banks as it sees muted prospects for new business due to expectation of weak corporate and consumer confidence, banks' continuing high -risk aversion and below-trend credit demand.

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