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Last Updated : Nov 03, 2015 04:58 PM IST | Source:

Banks' NPL pressures to ease, but only gradually: Fitch

The report further adds 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.

Moneycontrol Bureau

Indian banks' stressed assets are likely to have peaked this fiscal year, but the process of recovery is expected to be slow, says ratings agency Fitch Ratings.

In a report, the ratings agency has said that the resolution process will be inhibited by large asset stocks that the banks currently own combined with structural challenges in key sectors.


The company expects Indian banks' stressed assets ratio to improve after reaching a high of 11.1 percent in FY15, but only marginally to around 10.9 percent in FY16.

The report says: "NPL formation should be held back by a pick-up in GDP growth, which we forecast to reach 7.8 percent and 8.0 percent in FY16 and FY17, respectively."

The report further adds 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.

The ratings agency believes the asset quality for Indian banks is likely to remain an issue for the sector for some time despite some evidence of 'green shoots'. Here's why:

- State banks are in a weak position, as they account for 90 percent of stressed assets. Their ability to withstand even moderate amounts of stress is low, while most face some degree of core capital impairment in the ratings agency's updated stress test.

"Notably, around 60 percent 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," adds the report.

- Certain sectors saddled with high corporate leverage and weak debt-servicing ability remain high risk to the banking sector. Infrastructure and steel sectors, that both account for 20 perecnt of the total system loans, could yet see greater asset-quality stress if structural and policy-related issues are not addressed more urgently, cautions the report.

- 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.

The ratings agency 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," the report concludes.

Posted by Ritika Dange


Below is the verbatim transcript of Saswata Guha’s interview with Ekta Batra and Latha Venkatesh on CNBC-TV18.

Ekta: Can you start by telling us what is your expectation in terms of stressed assets in terms of a formation as a percentage to loans for FY16 versus FY15 and do you expect a further improvement in FY17?

A: Yes, as we said, our expectation is for the overall stressed assets ratio for the system to narrow slightly from where it was in FY15. So, in terms of numbers, that expectation is likely to go from 11.1 percent which was as of end March 2015 to around 10.9 as of March 2016. As you can see, the moderation is only slightly because we feel that within that obviously, there will still be some amount of non-performing loan (NPL) pressures.

The pace of incremental names has certainly slowed down, but we are seeing that the slippage or the mortality rate from the previously restructured loans is now increasing across banks. So, NPL pressures will still be there to an extent. However, now that the restructured thing is behind us we expect to see some degree of contraction in the restructured loan book for the system as a whole.

But clearly, the pressure points while lower than what they used to be will certainly remain for at least one more year.

Latha: If you look at the Axis Bank results, they guided for Rs 5,700 crore of stressed assets for the year and already in the half year, they have reported nearly Rs 5,000. On public sector undertaking (PSU) bank space, we had a bomb in terms of Indian Overseas Bank. So, what gives you this confidence?

A: There are issues with individual names, but what I am referring to essentially is for the system as a whole. As far as Axis is concerned, we have always believed that the potential of slippages in that book could be higher because of exposures to certain sectors. But that being said, asset quality is just one of the aspects of the credit metrics that you looked at, but especially when you look at the private banks, they are also very well capitalised. Their level of provision covers, specific provision cover on the NPL is also quite robust. As opposed to State Bank wherein none of the things match up to what private banks and interestingly you mentioned Indian Overseas Bank (IOB). One of the things that – we do not rate that bank publically, but of course we do stress test across Indian banks and one of the things that has been coming up and we have been highlighting that is IOB among the midsized banks essentially has been looking quite vulnerable and therefore, it does not come as a surprise to us given where its capital and asset quality is.

Latha: Let me put it another way. We recently, a week ago, had a report from Credit Suisse which pointed out that actually, the top-10 most leveraged groups to which banks have exposure have actually seen bank exposure increase. The amount of loan given to those leveraged groups has actually increased in the past three years. Then where is the confidence if overleveraged groups are only getting even more leveraged, then why are you of the opinion that the pressure on banks will decrease?

A: We are not saying that the pressure on banks will decrease. We are just saying that from NPL perspective, one is likely to see some moderation on the stressed asset ratio for the system as a whole. But let us not forget that there is a huge stock of stressed assets that is already out there and which will continue to have its share of impact on bank financials.

As far as large credits are concerned, I think compared to two or three years back, today we have the Large Credit Forum and thereafter the Joint Lender Forum and some of these aspects obviously have increased the level of scrutiny or so we hear from the Reserve Bank of India (RBI). So, our sense is that while yes, pressure points are there, but again, discretion along with regulatory scrutiny is lot higher now as what it used to be two or three years back.

Latha: Are you also betting that the cyclical recovery is definitely there and that is why you are expecting lesser and lesser stress?

A: At least anecdotal evidence seems to suggest that there are some signs of green shoots in certain sectors, but I guess it is hard to say whether the cyclical recovery has embedded itself in any solid way. What we are seeing is still the early signs of that inflection point. Hopefully, with the RBI rate cuts and most recently, with the 50 basis point rate cut, some of that could see better traction provided increasingly we see monetary transmission happening from banks and that has been sort of slow and we know the reasons why. But I think all-in-all, the direction is positive and from a momentum perspective, clearly, it is taking slightly longer than what we had initially expected.

Ekta: What is your view on 5/25 because a lot of the times we are seeing the gross NPL stabilise even without sale of loans to asset reconstruction companies, but there is that 5/25 picture of refinancing which banks report in the quarter and which does not necessarily go down well with the street. Do you consider it to be a part of your stressed asset book?

A: I think 5/25 is a fairly in due concept, we will see that increasingly getting applied this year as we have seen so far. Yes, we try and factor it in some way but, clearly, you could argue that that could be a potential red herring especially when banks do not follow it in terms of the laid out guidelines and 5/25. The problem with that especially with 5/25 is that it will escape as performing. So, there is no way it can actually get captured as a restructured asset unless the banks clearly lay that out which accounts and how much amount. So, there will always be a certain degree of ambiguity around 5/25, but yes, we are sort of looking at that.

Latha: You have lowered your current year NPL estimate to 10.9 or rather your stressed asset estimate to 10.9 from 11.1 percent last year. Do you have a number for the year after for FY17 because you have a gross domestic product (GDP) forecast for FY17? So do you have a stressed asset forecast as well?

A: We expect that to be in the range of 10.5-10.6, somewhere in that range.

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First Published on Nov 3, 2015 10:28 am
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