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Fitch: India Banks' NPL Pressures to Subside, But Only Gradually
November 3, 2015 / 3:33 AM / 2 years ago

Fitch: India Banks' NPL Pressures to Subside, But Only Gradually

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Indian Banks' Asset Quality here MUMBAI/SINGAPORE, November 02 (Fitch) Indian banks' stressed assets are likely to have peaked this fiscal year, but the process of recovery is likely to be slow, says Fitch Ratings. A large stressed asset stock combined with structural challenges in key sectors will inhibit a quick resolution process despite a cyclical macroeconomic recovery. Fitch expects Indian banks' stressed assets ratio to improve after reaching a high of 11.1% in FY15 (to end-March 2016, but only marginally to around 10.9% in FY16. NPL formation should be held back by a pick-up in GDP growth, which we forecast to reach 7.8% and 8.0% in FY16 and FY17, respectively. The Reserve Bank of India's more accommodative monetary policy stance since January 2015 should also help to boost credit demand and aid the recovery in banks' asset quality. Asset quality is likely to remain an issue for the sector for some time despite some evidence of 'green shoots'. First, state banks are in a weak position, as they account for 90% of stressed assets. State banks' ability to withstand even moderate amounts of stress is low, while most face some degree of core capital impairment in Fitch's updated stress test. Notably, around 60% of state bank NPLs have been overdue for over a year, and are increasingly resorting to write-offs and NPL sales to reduce their NPL stock. We expect this trend to continue. Second, some sectors remain high risk, saddled with high corporate leverage and weak debt-servicing ability, despite the improving macroeconomic environment. The infrastructure and steel sectors could yet see greater asset-quality stress if structural and policy-related issues are not addressed more urgently. Infrastructure and steel together account for 20% of total system loans, and are reported to account for up to 40% of stressed assets. Third, slow progress on stalled projects suggests risks remain to the recovery process, especially in the infrastructure and power sector where corporate leverage and weaker cash flows compound challenges for firms. Clearing stalled projects will be essential to reviving private-sector confidence and stimulating capital formation. Fitch maintains that clearing stalled projects would have a significant positive effect for the infrastructure sector - and, in turn, on bank asset quality. To that end, the government's announcements last month on reforms aimed at electricity distribution companies are positive for the sector, though it remains to be seen to what extent long-standing structural issues will be addressed. Fitch assessed India's banking sector asset quality in its latest Special Report "Indian Banks' Asset Quality" published on 3November. The report is available to subscribers by clicking the link above or at www.fitchratings.com. Contacts: Saswata Guha Director Financial Institutions +91 22 4000 1741 Wokhardt Tower, West Wing, Level 4 Bandra Kurla Complex, Bandra East Mumbai, 400 051 Jobin Jacob Associate Director Financial Institutions +91 22 4000 1700 Justin Patrie Senior Director Fitch Wire +65 6796 7232 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Related Research Indian Banks Report Card: FY15 here Indian Banks' Capital Challenge here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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