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

When Jaitley asked me to guess his age...

Sometime in 1999, I took Arun Jaitley out for meal for the column, “Lunch with Business Standard”. As is his wont, he chose his own place for lunch. It was at the Chambers at the Taj Mansingh hotel, an exclusive domain of the high and the mighty Delhi. As we sat down for the meal

Thus ends the Chidamba-Run!

The arrest of Palaniappan Chidambaram, former union minister of home & finance, by the CBI, albeit after his much dramatic disappearance and reappearance, has brought an end to his long run from the arms of law. As a finance minister, being at the other end of the law, the former ministe

What Imran’s rant against RSS tells us about Modi’s Kashmir policy

An unintended consequence of the inversion of Article 370 and the division of the state of Jammu and Kashmir into two union territories is the curious revival of Pakistan’s interest in Indian history and sociology. For the first time in decades, a Pakistan prime minister made the Rasht

On a Personal note with actor Neeraj Kabi

Neeraj Kabi, a critically acclaimed self-taught actor, theatre director, and acting teacher, has worked in Odiya, Hindi and international cinema, theatre, television and web series. In 2014 he was honoured with the best actor award at the 4th Sakhalin International Film Festival for his role in the fil

Talking to Trump, Modi hits out at Imran’s anti-India rhetoric

Prime minister Narendra Modi has told US president Donald Trump that Pakistan prime minister Imran Khan’s “incitement to anti-India violence” was not good for peace in south Asia. Modi and Trump had a telephonic conversation – their first since the Aug 5 move to chang

Paediatricians call for junking unhealthy food

As children are consuming more and more fast foods and sweetened beverages are becoming, leading to obesity and related non-communicable diseases (NCDs), the Indian Academy of Pediatrics (IAP) has come out with guidelines on such substances. The dietary guidelines under its nutrition chapter



Current Issue

Current Issue

Video

CM Nitish’s convoy attacked in Buxar

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter