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
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.
Home minister Amit Shah’s remark on the need for a single national language has rightly sparked a debate, but the headlines missed much in his speech about language, culture, and identity. Giving away Rajbhasha Gaurav Puraskar and Rajbhasha Kirti Puraskar awards on the occasion of Hin
Renowned British singer, songwriter and reggae DJ, Apache Indian (originally known as Steven Kapoor) shot to fame with his style of music which came to be known as bhangramuffin (also called bhangragga) – a mix of bhangra, reggaemuffin and traditional dance hall in the early 1990s. His style changed
When close to five lakh people are killed in road accidents every year in India, road transport minister Nitin Gadkari should have been complimented on his not-so-populist move to impose higher fines for traffic violations. Instead, many people are unhappy and several states – mostly ruled by the BJP
Traditional fishermen or Kolis; synonymous with feasting, song and dance; are the original inhabitants of Mumbai. For generations, they have loved their vocation and prided in it. But their work and lifestyle are facing threats from reclamation, land acquisition by builders, lack of sustainable fishing pra
Addressing the Conference of Parties (COP14) to the United Nations Convention to Combat Desertification (UNCCD), Prime Minister Narendra Modi on Monday announced that India would raise its target of the total area that would be restored from its land degradation status from 21 million hectares to 26 millio