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

SAIL launches smart trash bins to develop smart garbage stations

SAIL has rolled out stainless steel smart garbage bins, which will display signals to the collection vehicle about the ‘fill-up’ position.   A smart garbage station will be set up at Bhikaji Cama Place, which is being developed by SDMC (South Delhi Municipal Corporati

Civil enclave at Hindon airport unveiled by PM Modi

Prime minister Narendra Modi recently inaugurated a civil enclave at Hindon airport in Ghaziabad. The development of new civil enclave at Hindon airport is aimed at reducing the burden of Delhi’s IGI Airport and will also serve the passengers from Delhi NCR and Uttar Pradesh. Hindon

Rethinking healthcare

The new world is aggressively batting for individual rights and self-determination. As the society is evolving for the better, we see a more assertive Indian coming to the fore. An Indian who has higher expectations and an Indian who is cognizant of his/her rights. Our constitution guarantees us several fr

Why not have a reconciliation panel?

Jenine di Giovanni, a reporter who was a first-hand witness to the destruction in Bosnia, Chechnya and other places, wrote: “In the aftermath of any war or genocide, healing and reconciliation are ultimate aspirations.” After some years of the end of the apartheid era in South Africa, the Truth

An engineering disaster

After passing the 12th board exams in 2014, Vikas Kumar, of Madhepura in Bihar, took a year’s break to prepare for the engineering entrance exam. The hard work paid off and he managed to score high enough to qualify for admission to one of the prestigious National Institutes of Technology (NITs), whe

Why AAP-Congress alliance could be a threat for BJP

The Congress party has unanimously supported Sheila Dikhshit`s decision to reject an alliance with the Aam Aadmi Party (AAP) in Delhi. With the Congress shutting the prospect of alliance, the national convener and Delhi chief minister Arvind Kejriwal has slammed the party saying that when the whole nation



Current Issue

Current Issue

Video

CM Nitish’s convoy attacked in Buxar

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter