Banks' asset quality to worsen this year: Fitch

Global ratings agency Fitch today 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% of the total assets from about 3% 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% of total loans, significantly higher than the 4.4% 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% 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% 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.