Asset quality of Indian banks to worsen this year, says Fitch

Global ratings agency Fitch said the asset quality of Indian banks is expected to further deteriorate in 2012.

The non-performing assets of Indian banks are expected to touch 4 per cent of the total assets from about 3 per cent in 2011, Fitch said in a report.

“The momentum of rising NPLs may continue through most of 2012. Stresses are also building up in infrastructure loans caused by delays in project implementation and cost overruns,” it said.

“Some of these are being restructured; the high single- name concentrations in this business may push up state-owned banks restructured portfolios to 7-8 per cent of total loans, significantly higher than the 4.4 per cent level in the aftermath of the 2008 global financial crisis,” it said.

Borrowers are affected by rising input costs, including interest rates; a slowdown in demand growth and sharply fluctuating exchange rates, it said.

Part of the problem may ease in mid-2012 if monetary policy is relaxed to stimulate growth, though the timing is uncertain given the cost-push of the 11 per cent depreciation of the rupee since January 2011 – and its impact on the stubbornly high inflation rate, it said.

Fitch also said the stable outlook for Indian banks is premised on a recovery in the domestic economy in 2012, together with a continued commitment by government to maintaining a minimum Tier 1 ratio of 8 per cent for its public sector banks accounting for 73 of system assets.

While this is a base-case scenario, it said, the pressures on the downside are mounting – through weakening asset quality and a build-up in credit concentration.