NPA in banking to rise up to 5%: Fitch

Written by feBureau | Mumbai | Updated: Jan 31 2009, 06:08am hrs
Following Moodys suit, Fitch Ratings has painted a gloomy picture of the Indian banking industry. Fitch on Friday said the non-performing loans of the Indian banking sector could go up to 5% by 2010.

The Indian banks bad loan recoveries are likely to go down further in future. Also, the restructuring of corporate loans may shoot up in the days ahead. The delinquencies in housing loans too are expected to increase.

Chintan Doshi, associate director (financial institutions), Fitch Ratings said, Currently, lending to recession-hit sectors like infrastructure, textile and steel account for 23%, 11% and 9%, respectively, in Indian banks total advances. These is worrisome statistics, likely to impact the banks bottom-line in the future.

Doshi said since the Centre has set a precedent by declaring the agri-debt waiver scheme for the peasants, good borrowers in this segment too may not henceforth pay back their dues to banks. Its expected to impact the state-owned banks.

Ananda Bhoumik, senior director, Fitch Ratings said, Parameters like anticipated slowdown in the Indian banks credit growth, reduction in their fee-based income and reduction in their net interest margins are likely to decelerate their absolute profits in future.

Fitch Ratings has stated that Indian banks are likely to see a significant deterioration of their small and medium enterprise and the corporate loan books during 2009 and 2010 as a result of the slowdown in the economy, Furthermore, a recent corporate scandal has raised fresh concerns about corporate governance and the veracity of reported numbers of Indian institutions, which if more widespread, may result in greater downside risk to the performance of Indian banks.

Earlier, Moodys Investors Service had changed the fundamental credit outlook for the Indian banking system to negative from stable, reflecting the deceleration of the Indian economy in the context of the global financial turmoil and an increasingly bleak economic outlook, which, combined with higher loan delinquency rates, indicates a potential weakening in the asset quality of Indian banks.

Moodys negative credit outlook for the Indian banking system expresses the rating agencys view on the likely future direction of fundamental credit conditions in the industry over the next 12 to 18 months. It does not represent a projection of rating upgrades versus downgrades.

The gloomy macro scenario and the change in outlook, and their effects on the ratings of Indian banks, are discussed in greater detail in Moodys new special comment entitled Stress Testing Indian Banks Asset Quality.

The global deleveraging process has caused a large capital outflow from India since October 2008 and, as a result, there has been a tightening in the provision of credit to the real economy from banks and higher capital costs for corporates, said Nondas Nicolaides, Moodys vice-president and a senior analyst in Financial Institutions Group.

Moreover, a reversal of the favourable credit cycle in India that has underpinned the robust loan growth of the past few years has gradually been taking place, combined with weakening business and corporate earnings, Nondas Nicolaides added.