Fitch foresees increase in bank NPLs

Says high interest rates and surge in defaults to be blamed.

Rating company Fitch today said banks should get ready to put behind the long spell of improvement in gross non-performing loan (NPL) ratios.

Elevated interest rates, surge in defaults in unsecured consumer loans and losses suffered by textile and gems and jewllery exporters due to rupee appreciation may increase the NPLs of the banking system.

A study of six state-owned and there large private banks showed NPL ratios moved down steadily until December 2006 (as they have been doing since the early part of this decade). But, later they appear to be flat and have even shown upward movement for a few banks as rising interest rates affected delinquencies, Fitch said in the annual review of Indian banks.

"It is difficult to foresee further improvements as the operating environment has turned distinctly challenging with rising interest rates and with loans starting to season," it said.

It is perhaps more likely that NPLs would continue to rise, albeit gradually, and specific loan loss provisions would need to be stepped up.

Banks have improved general provision requirements and touched 70 per cent of gross bad loans by the end of March 2007. Sustaining this (continuous improvement) would clearly be a challenge if NPLs were to rise, which reinforced the argument that profitability would continue to remain under pressure, it added.

The interest rates on loans have been on rise since April 2006. This has affected the retail borrowers' repayment capacity. New private banks, such as ICICI, have led the unsecured consumer loan segment. Consequently, delinquencies went up in this area.

While this segment forms less than 5 per cent of loans in the banking system, the proportion is higher for some of the new banks. For example, unsecured consumer loans formed 10% of ICICI's total loans at end-September 2007 but about 35% of its gross NPLs.

The rising proportion of delinquent unsecured loans among the new private banks has also affected their overall recovery from NPL accounts (see Chart 2), which fell as a percentage of outstanding NPLs in FY07, reflecting higher losses in the unsecured lending business, it said.