Stressed asset ratios across Indian banks may have peaked in 2014-15, with asset quality pressures unlikely to subside quickly, said rating agency Fitch in a note on Monday. It also said that while banks have managed to boost their capital ratio marginally by tapping the local market to raise hybrid capital, the need for capital remains substantial.
The stressed assets ratio rose to 11.1% in fiscal 2015 compared with 10% in the previous fiscal, with a bulk of the pressure coming in the second half of the year due to a surge in restructured assets, noted the rating agency.
The pace of restructuring had picked up ahead of the March 2015 deadline for regulatory forbearance given to restructured assets. Starting April 2015, banks have to make higher provisions for restructured loans as they could no longer be classified as standard assets.
“Fitch expects India’s real GDP (gross domestic product) growth to improve gradually (FY16: 7.8%; FY17: 8.1%). This should eventually help reverse the asset-quality cycle, but the recovery process will be slow. Corporate leverage is high, while policy-rate transmission by banks’ through lending rates has been slow despite a cumulative 75bps (basis points) rate cut by the central bank since January 2015. Anecdotal evidence suggests progress in stalled projects, although any meaningful impact will await the ongoing restructuring,” said Fitch.