Despite fall in NPAs, asset quality woes persist: Fitch

Efforts to deal with reported NPAs might mean the peak in stressed assets could be lower than the previous estimate of 15% by FY15

Rating agency Fitch on Monday said despite a decline in the non-performing assets (NPAs) of many banks in the quarter ended March, concern on the asset quality of Indian commercial banks remained, as economic conditions were weak and the pace of recoveries low.

It added though the fall in reported NPAs was driven by an improvement in asset quality, it was also likely there was a concurrent decline in the number of new NPAs and higher recovery rates for these assets.

As of March-end, the number of new loans turning into NPAs was about three times the loans recovered and upgraded at large state banks, Fitch said. There was evidence of higher recovery rates, it said, adding write-downs and portfolio sell-offs to asset reconstruction companies were likely to play a major role in reducing reported NPAs.

Efforts to deal with reported NPAs might mean the peak in stressed assets could be lower than the previous estimate of 15 per cent by FY15, Fitch said. The NPA ratios of many state-banks had improved unexpectedly in the quarter ended March and it was likely stressed assets in the banking system in FY14 were lower than expected, the agency added.

However, asset quality pressures would remain until there was a decline in new NPAs, Fitch said.

State-owned banks, especially mid-tier ones, were in a difficult position, owing to high stressed assets, and weak capital and earnings positions. State-owned banks’ exposure to sensitive and structurally weak sectors was high, Fitch said, adding no dramatic recovery on this front was expected in the near term.