Bad loan clean-up prospects at Indian banks improving: Fitch

Demonetisation has had a net beneficial impact on the sector by triggering a sharp influx of low-cost deposits, says Fitch Ratings

GN Bureau | May 15, 2017


#Bad loan   #Banking   #Reserve Bank of India   #RBI   #NPA  


Recent regulatory actions in India suggest the authorities are making a more concerted push to tackle banks' bad loan problems, says Fitch Ratings.

"We believe that asset resolution will be a dominant theme in the sector over the next few years," it says.

In the short term, this is likely to create provisioning costs that will mean continued pressure on bank profits, and it is possible that further losses will push some weaker banks closer to breaching minimum capital requirements, unless they receive pre-emptive capital injections. However, the increased powers given to the Reserve Bank of India (RBI) to clean up asset quality, and to intervene in banks at an earlier stage when risks build, represents an important positive step toward ensuring a healthy banking system in the future.

The government's recent step to enhance the RBI's powers appears to be a signal to the regulator to assume a more interventionist approach to directly tackle banks' slow progress on bad loan resolution. RBI direction that pushes banks into initiating insolvency processes against borrowers could help to break a deadlock caused by concerns among bank officials that decisions on troubled borrowers will attract investigation by anti-corruption agencies.

Regulation to speed up resolution is the logical next step to follow the asset-quality review and other measures that increased recognition of bad loans over the last two years. This was important as there has been little evident progress on bad-loan resolution. We believe this natural progression reflects stronger intent and willingness from the authorities to address the problem. There will be significant implementation challenges, but asset resolution is likely to strengthen over the next few years, says a communiqué from Fitch Ratings.

The resolution of non-performing loans is likely to require significant haircuts if the re-priced loans are to attract attention from private investors and asset-reconstruction companies. State banks, which hold the bulk of stressed assets, are likely to report low returns on assets for FY17 and any material recovery is likely to be delayed as resolution crystallises losses and forces a higher level of provisioning.

Further losses at some of the weakest small- to medium-sized state banks could pressure them to shrink, or to eventually exit the system by entering into forced mergers. We expect the authorities to manage this in a way that is least disruptive for the financial system, but the process will entail risks for investors of capital securities, at least in the case of weakest banks. We believe it has become more likely that the number of state banks will fall in the medium term.

The large state banks will also face higher provisioning costs and we expect them to eventually receive more capital from the government than has already been budgeted. However, very weak loan growth could mean that banks will require less new capital by FYE19 than we had previously estimated. Bank loan growth reached a multi-decade low of around 5 percent in FY17, and looks set to remain low for the next one to two years.

Fitch says that demonetisation has had a net beneficial impact on the sector by triggering a sharp influx of low-cost deposits, and there are signs that banks are retaining a higher proportion of these deposits than they had initially predicted. The resulting decline in funding costs may not be enough to counter the pressures of income loss and weak growth, but should allow banks some more room to absorb higher provisions and lessen the impact on their capital.
 

Comments

 

Other News

Elections 2024: Why Mumbai and Maharashtra verdict is crucial

In the ongoing Lok Sabha elections, Maharashtra with 48 Lok Sabha seats is of crucial importance for the final outcome. In the 2019 election, the Shiv Sena-BJP alliance won 42 seats including six seats in Mumbai, as well as one each in Thane, Kalyan, Bhiwandi, and Palghar, which fall in the Mumbai Metropol

Jammu-Kashmir makes indelible mark on electoral history

In a massive stride for India’s electoral polity, Jammu and Kashmir has registered its highest poll participation in the last 35 years in the General Elections of 2024. The Combined Voter Turnout (VTR) at the polling stations for the entire union territory, which has 5 Lok Sabha seats

New study tracks heat wave; exposes dangerous trends in big cities

An unprecedented heat wave has been enveloping Indian cities, worsening the urban heat island effect, this summer. A new analysis by Centre for Science and Environment (CSE) says there are far deeper and longer term evidences on the nature of this changing trend that is impacting the biggest cities of the

Phase 6: Voter turnout 59.06% at 7:45 PM

Polling in the sixth phase of General Elections 2024 which commenced across 58 PCs recorded an approximate voter turnout of 59.06% as of 7:45 pm Saturday. In spite of hot weather in certain parts of the country, voters were undeterred in their enthusiasm as they were seen queuing up patient

Banks not adhering to RBI guidelines, finds study

Banks across India are levying inconsistent service charges on basic savings accounts. A study, “Benchmarking Reasonableness of Service Charges by Banks in India”, uncovers and exposes inconsistencies in adherence to RBI mandates by banks. It finds some banks impose charges exceeding reasonable

“Mumbai Infra boom similar to that of Manhattan in 19th C”

Mumbai’s ongoing infrastructure boom – with a new coastal road, Atal Setu, metro lines and much more – creating transport corridors – is comparable to that of Manhattan in New York during 1811-1870, according to BMC commissioner Bhushan Gagrani. The iconic projects being implemented

Visionary Talk: Amitabh Gupta, Pune Police Commissioner with Kailashnath Adhikari, MD, Governance Now


Archives

Current Issue

Opinion

Facebook Twitter Google Plus Linkedin Subscribe Newsletter

Twitter