Large Indian Banks capable of withstanding NPA pressure: Fitch

Tuesday, 09 October 2012 07:21 administrator
In its  2013 Outlook series on Indian banks, 2013 Outlook: Indian Banks, NPLs to Rise: Stress Test Highlights Largely Intact Core Equity, Fitch said it expects the banking system's gross non-performing loans (NPL) ratio to reach 4.2 per cent in the financial year to March 2013, up from a previously estimated 3.75 per cent.
Fitch Rating also stated that majority of Indian banks appear resilient to the mounting asset quality pressure and have reasonable buffer to withstand stress. The rating agency, however, cautioned that credit quality of domestic lenders is expected to deteriorate further in coming quarters. 
"Most banks have a reasonable buffer to withstand increased stress," it said, while it warned a few medium sized banks with poor equity base of possible downgrades if their exposure to stressed assets continues to rise without a corresponding increase in equity buffer.

"Asset quality is likely to remain under pressure at least for the next three to four quarters, particularly from the infrastructure sector in which banks' exposures are concentrated."
This is evident in the government's recently announced reforms for struggling state power utilities (around 3 per cent of total system loans). The long-term solution, however, lies in restoring the financial viability of state utilities which carries high execution risk given the political sensitivity around tariff hikes.
According to Fitch the bulk of stress in infrastructure is residing in restructured assets and will not be visible in the reported non-performing loan numbers where pressures are largely cyclical.
Most large government and private banks have passed its stress test, Fitch noted. 

A few banks, especially the mid-sized lenders, with high asset concentration and weak equity are more vulnerable. "This leaves their viability ratings vulnerable to downgrade if exposure to stressed assets continues to rise without a corresponding increase in equity buffer," Fitch said. 
"Restructured assets in 2011-12 were significantly higher than during the last restructuring exercise in 2008-09. Fitch believes that stressed assets (including restructured assets) for the system will likely exceed the agency's 10% estimate for 2012-13," it said.