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

Cast your vote, not vote for caste

Once the schedule for the next assembly elections has been announced, there is a flurry of activity around building caste coalitions. This is more intense in the most populous state,  Uttar Pradesh, which is the most important state in India in any election, in view of its large population estimated a

Maharashtra cities dominate Smart Cities Mission #Streets4People Challenge

In a competition organised by the Ministry of Housing and Urban Affairs (MoHUA), Pune, Pimpri-Chinchwad, Nagpur and Aurangabad from Maharashtra are among the 11 cities selected for scaling up their pilot projects and creating permanent public infrastructure. #Streets4People Challenge was org

CNC, Admiral R Hari Kumar condoles deaths of three navy personnel

The three Navy personnel who succumbed to injuries caused by an explosion on board Indian Navy`s destroyer ship INS Ranvir have been identified as Krishan Kumar MCPO (master petty chief officer)I, Surinder Kumar MCPO II & AK Singh MCPO II. In a condolence message, Admiral R Hari Kumar s

Two Indias: One for the billionaires, one struggling for minimum wages

Oxfam India has this week released ‘India Supplement 2022’ with deserving caption ‘inequality kills’. The supplement discusses India’s governance structures that promote the accumulation of wealth by a few, while failing to provide safety netsto the rest of the population. The

Aditya Thackeray launches 2 Oxygen cylinder recharge points

After the oxygen crisis faced during the second wave of Covid-19, the BrihanMumbai municipal corporation (BMC) has now set up its own medical oxygen cylinder recharge projects.   On Tuesday, guardian minister Aditya Thackeray launched two of the BMC’s new medical oxygen cylinders r

How inequality keeps rising amid pandemic – and is killing people

The world’s ten richest men more than doubled their fortunes from $700 billion to $1.5 trillion (at a rate of $15,000 per second or $1.3 billion a day) during the first two years of a pandemic while the incomes of 99 percent of humanity fall and over 160 million more people forced into poverty. A new

Visionary Talk: Farmer`s Agitation, Rakesh Tikait with Kailashnath Adhikari


Archives

Current Issue

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter