Non-performing assets will rise over the next year for Indian banks as the economic downturn continues, Fitch Ratings has said in study.
Recent asset quality trends at both large and mid-sized government banks confirm forecasts that the Indian banking system’s reported gross NPA ratio will rise close to 4.2 per cent of the advances for the year to March 2013 (FY’13).
“The proportion of restructured assets (not included in the reported NPAs) has also increased sharply. The total NPA and restructured assets ratio may well exceed 10 per cent at FY13,” it said.
At the end of the first-half of FY’13, gross NPAs in the 10 largest government banks — accounting for over 70 per cent of the Indian banking system assets and a key driver in shaping system averages — rose by about 60 per cent from a year earlier and by 32 per cent from end-FY’12.
These banks also account for the bulk of the NPA stock and restructured assets and are likely to see further pressure from the impact of slowdown in the next few quarters.
According to Fitch, the average NPA ratio for the top 10 government banks is approximately 3.7 per cent. State Bank of India (SBI), which started to address its asset quality problem relatively early, reported an increase in non-performing loans to 5.15 per cent at end-September 2012, from 4.19 per cent a year ago but accompanied by a far lower share of restructured assets. Experts expect SBI’s NPA ratio to be one of the first to level off.
Asset quality pressure is increasingly visible at other large government banks, which have reported sharply higher NPAs in last two quarters. It is estimated that this trend will continue with the other banks as the effect of the economic slowdown is fully reflected in their asset quality performance.
The prolonged stress in the infrastructure sector will put the greatest pressure on the asset quality and could cause problem loans to spike — as most of the stressed exposures are currently classed as restructured assets. Since 2007, the infrastructure boom has led to a concentration in lending to the sector and to single names, particularly power utilities. Small and medium-sized Indian banks, such as UCO and Vijaya, with concentrated regional profiles are viewed as most vulnerable if stress levels increase. Larger banks such as State Bank of India and Bank of Baroda, with diversified loan portfolios and