Indian banks benefit from lower slippages but challenges remain: Fitch Ratings

The banking sector's non-performing loan (NPL) ratio improved in first nine months of current financial year but slow resolution and weak capital are likely to keep the overall pace of recovery tepid, according to global credit rating agency Fitch.

Lower fresh slippages and better recoveries were instrumental in driving down the banking sector's gross NPL ratio to 10.8 per cent in April to December 2019, according to Fitch's estimate, from 11.5 per cent at fiscal year-end 2018.

Indian banks, however, continue to face challenges on multiple fronts.

Weak earnings, in particular government-owned banks, and thin capital buffers remain at risk from ageing provisions which stem from slow resolution of the sector's 150 billion dollar NPL stock (FY18).

Overall credit costs, despite a decline in percentage terms from previous years, remained high compared with most state banks' weak pre-provision profits.

As a result, several state banks reported losses in first nine months of 2018-19 while the common equity tier 1 for nearly half of the 21 state banks was below the minimum 8 per cent required by 2019-20.

Fitch said the government's February 2019 decision to recapitalise banks by an additional 7 billion dollars in FY19 provides banks with near-term reprieve but may not be enough to support growth, considering ongoing provisioning and their weak earnings outlook.

The Reserve Bank of India's decision earlier this month to defer Indian Accounting Standards (IndAS) implementation for banks for the second consecutive time underscores some of the near-term challenges and reflects the authorities' aversion to compound the sector's weak financials, it said.

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