The rating agency, in its analysis of the banking sector in India and Indonesia, said that a further downside risk exists if bad loan problems and thin loss-absorption buffers persist. But there are many initiatives in the works to repair the books of banks, especially public sector banks.
The successful resolution of bad loans currently under the National Company Law Tribunal (NCLT) and the government's plan to infuse an additional $11 billion in FY19 could stabilise balance sheets over the medium term, Fitch said in a statement.
Fitch has downgraded the viability ratings of several of these banks over the past four years due to their weakening intrinsic strength.
The Indian and Indonesian banking sectors have experienced contrasting fortunes in recent years. The recovery of Indonesian banks from a commodity-sector downturn prompted the agency to revise its sector outlook to stable from negative in late 2017.
But, it’s the negative sector outlook on Indian banks that has been maintained for several years due to continuing problems with bad loans and paucity of capital. Indian banks reported large losses in the fiscal year ended March 2018 (FY18), as the new regulatory NPL framework accelerated bad-loan recognition and pushed up banks' credit costs. Consequently, the sector’s NPL ratio rose to 12.1 per cent, from 9.6 per cent in FY17, and 4.1 per cent in FY14.
Return on average assets (ROAA) turned negative. By contrast, there was a relatively small increase in the NPL ratio for Indonesian banks – to 2.8 per cent in 2018, from 1.8 per cent at end-2013.
The ROAA of Indonesian banks has since improved on the back of a decline in credit costs to 1.5 per cent of the average loans from a peak of 2.7 per cent in 2016, it added.