Banks' NPL pressure to subside, green shoots visible: Fitch

He said, speedier resolution can have a huge impact in reviving the sector

Fitch Ratings on Tuesday said growth in non-performing loans (NPLs) of the Indian banking system will slow down in the current financial year and some green shoots are visible with regard to their asset quality.

“Fitch Ratings expects Indian banks' stressed asset ratio to improve marginally to 10.9 per cent in the current financial year from 11.1 per cent in FY15,” it said in a report on Indian banks' asset quality.

It said the growth in new NPLs would slow down further with cyclical recovery, and a moderate pick-up in loan growth will also provide a support.

"The stress in structurally weak sectors has not entirely subsided, though we believe that banks will use the available recourse to restructure and reschedule sector-specific loans," it said.

Fitch also highlighted the need to clear stalled projects, saying speedier resolution can have a huge impact in reviving the sector, stimulate capital formation and allow greater flexibility to banks to pass on interest cuts.

Fitch said asset quality is likely to remain an issue for the sector for some time despite some evidence of green shoots.

The infrastructure and steel sectors could yet see greater asset-quality stress if structural and policy-related issues are not addressed urgently. Infrastructure and steel together account for 20 per cent of total system loans, and are reported to account for up to 40 per cent of stressed assets.

“Despite some green shoots in certain sectors (road), there will be potential challenges in structurally weak sectors like infrastructure (including state electricity distribution companies), steel, construction, although NPL additions might be moderate,” it added.

It said with recovery in GDP growth, NPL formation would be held back. Fitch projected the economy to grow 7.8 per cent in the current financial and eight per cent in FY17, up from 7.3 per cent in FY15.

Further, the RBI's more accommodative monetary policy stance since January 2015 should also help to boost credit demand and aid the recovery in banks' asset quality.

"Slower-than-expected economic growth and weak ability of banks for monetary transmission are likely to make the asset-recovery process prolonged," it said.

State banks account for more than 90 per cent of total stressed assets and are increasingly resorting to write-offs and NPL sales as a preferred route for reducing NPL stock.

“We expect this trend will continue until recoveries and upgradations outrun incremental NPLs by a meaningful margin,” it said. Fitch said retail sector would remain primary loan growth driver in the near term, until private-sector capex sees some revival.

It expects policy initiatives to bring the investment climate in India closer in line with that of its peers, though whether reforms would translate into higher real GDP (gross domestic product) growth would hinge on actual implementation.

Indian banks' loans grew by 9.7 per cent in last financial year from 15 per cent in FY14, the slowest in a decade. The retail and farm sectors were key contributors, while industry and services witnessed a sharp reduction.

Loan growth was weak in the first quarter of the current fiscal, but a moderate pick-up is likely if the central bank's more flexible monetary stance finds equal transmission by banks.

"The state banks will find it difficult to pursue aggressive growth, given their weak capital buffers and high share of stressed assets," Fitch added.