Rising rates up NPA risks: Fitch

A 30 per cent annual growth in bank credit for the last three years plus hardening interest rates are likely to grow the quantum of non-performing assets (NPAs), according to Fitch Ratings.

The vulnerable loans categories "� unsecured consumer loans, capital market exposure and real estate loans "� are the prime candidates which would add to bad assets.

"The borrower profile in some metropolitan areas is more vulnerable today than few years ago," said Ananda Bhoumik, director, Fitch Ratings India.

However, these categories comprise less than 10 per cent of total loans. The median net NPL/ equity ratio (less than 10 per cent in 2006-07) is therefore unlikely to rise sharply.

The Indian banks have made structural improvement in their risk management capabilities and also raised capital from the buoyant domestic and international capital markets. "We do not see any solvency issue in the next 12-18 months," he said.

Fitch views that the rating outlook for the Indian banking sector remains stable. Creditor rights have been improving. While an auction market for distressed assets will take a while to be established, banks have been able to increase recoveries from delinquent accounts through negotiated settlements.

The continued pace of financial reforms has also resulted in the development of new institutions for clearing and settlement of debt market transactions, foreign exchange and derivative instruments.

The credit information bureaus and asset re-construction companies have also begun business. Both have strengthened the financial system and improved its efficiency.

Fitch observed that Indian banks would remain the dominant financial intermediary in an economy characterised by relatively low credit penetration. The percentage of bank loans to gross domestic product (GDP) was around 50 per cent in FY07.

The sector is regulated and extensively monitored by Reserve Bank of India (RBI), who has gradually tightened prudential norms and has been introducing international disclosure and accounting standards.