Credit slowdown provides relief to banks: Fitch

Amid Indian banks struggling to raise money, a slowdown in credit demand has brought relief, albeit temporary, on the funding front. Also, the pressure on incremental loan/deposit ratios had eased, rating agency Fitch said in a report on the Indian banking sector.

However, the sustainability of this trend remained in doubt, as weakness might emerge if loan growth returned, the agency said.

In household savings, there has been a persistent shift towards physical assets. Amid rising loan tenures, reliance on short-term funding sources had challenged the traditional funding strength of Indian banks, largely deposit funded, the report said. This dependence creates higher volatility in funding costs, with high overnight borrowings from the central banks.

The necessity to fill the cash flow vacuum remains high, with 10 per cent of the system’s stressed loans not generating cash flows as expected. In 2011-12, liabilities (only deposits and borrowings) maturing within a year accounted for about half the total liabilities. This, the report said, presented refinancing risks, though the system data suggested some stability this financial year.

Fitch said the risk was higher for mid- and small-tier state banks, as for these, limited reach and access to urban areas (78 per cent of deposit contribution in 2011-12) were major impediments. Their refinancing risks were primarily manifested through heightened pricing volatility, owing to their state-owned status. Surplus government securities (over and above statutory reserves) had been used to largely bridge this contingent liquidity risk, Fitch said, adding these were likely to remain so until deposit growth improved.