JOIN USRating agency Fitch has retained its negative outlook on India’s banking sector, stating that it reflects the fragile standalone position of state-owned banks.
“The negative sector outlook reflects the fragile standalone position of state-owned banks, and suggests there may be more downside risks for their Viability Ratings (VR) if the risks of deteriorating asset quality and weak earnings are not offset by larger capital injections,” Fitch said.
Resolving asset quality and capital adequacy is particularly important for public-sector banks if they are to achieve the twin objectives of credit growth and regaining market access, Fitch added.
According to Fitch, stressed asset ratio for banks are likely to increase further and non performing loans (NPLs) are likely to slow down.
“Fitch expects the stressed-asset ratio for Indian banks' to increase to around 12% in FY17 (FY16: 11.4%). The asset-quality indicators are possibly close to their weakest levels, but the picture will remain challenging as sectoral stress and slow resolution remain a drag on the pace of recovery,” the rating agency stated.
NPLs are likely to slow down, but consistently fast-paced loan growth in retail (including small business) may create vulnerabilities for future asset quality, Fitch added.
Fitch expects credit growth at around 10% during FY17, given the overhang of stressed balance sheets, poor capitalisation and a high focus on recoveries.
Beneficial monsoons and retail growth can help mitigate some pressure. However, Fitch believes that achieving meaningful and sustained credit growth will be difficult without a revival in industrial demand, which comprises almost half of total system loans. Banks' risk-aversion, coupled with an inability to effectively pass through policy rate cuts has not helped either. Persistent weak growth inflates asset-quality indicators and delays the recovery process.