Operational environment for Indian Banks strengthens, risks reduce: Fitch

Fitch Rating News: As economic risks related to the COVID-19 outbreak have decreased and lenders have put in place adequate stress-testing measures, the operational environment for Indian banks strengthened, said Fitch Ratings on Wednesday, according to a Reuters report 

"A number of prudential indicators for the sector have also improved compared with pre-pandemic levels, though growing risk appetite in a relatively benign OE (operating environment) highlights the importance of appropriate buffers against potential stress," the rating agency said in a note, reported Reuters.

Following the pandemic, Indian banks strengthened their capital reserves and cleaned up their balance sheets, and as of March 2023, their gross non-performing asset ratio had decreased to a 10-year low of 3.9%.

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Fitch observed that due to the strengthening of capital buffers, the sector's average common equity Tier 1 capital ratio increased from 10.4% at the end of fiscal 2018 to 13.4% at the end of fiscal 2023.

Earnings buffers at banks also appear "significant," said Fitch in its report.

According to Fitch, the sizeable economy and favourable demographics of India should provide banks with possibilities to grow their clientele and diversify their sources of income.

However, rapid loan growth and higher exposure to certain asset classes are also likely to indicate greater risk appetite amid stiff competition, which could raise risks if not managed carefully, it warned.

Although loan demand has been strong in April–June, Fitch anticipates modest normalisation of credit growth for 2023–2024.

In the three years leading up to March 2026, it predicts that India's real gross domestic product will expand by an average of 6.4% yearly.

Also Read: Private banks better placed than state banks in India: Fitch Ratings

Fitch Ratings analyst Chris Wolfe warned that the US banking industry has inched closer to another turbulence — the risk of rating downgrades on dozens of US banks that could even include JPMorgan Chase, a report from CNBC said Tuesday.

In June, the ratings agency lowered the score of the US banking industry's "operating environment" to AA- from AA, citing pressure on the country's credit rating, gaps in regulatory framework and uncertainty about the future trajectory of interest rate hikes.

Also Read: Fitch warns it may be forced to downgrade dozens of US banks, including JPMorgan: Report