A sharp increase in non-performing loans reported at India’s largest government banks indicates that fiscal 2013 impaired assets across the banking sector may exceed our initial forecast as the economy slows,Fitch Ratings says.
Absolute cumulative gross NPLs reported at India’s five largest banks – accounting for over a third of the system assets – increased by around 62% in Q113 from a year before,and there was also a sharp increase in restructured assets. State Bank of India ,the country’s largest bank,reported a gross NPL ratio of 5% in Q113,up from 4.5% in FY12. The trend is matched across other large and small government banks,albeit to varying degrees.
Our estimate of 3.75% for system-wide gross NPLs in the fiscal year ending March 2013 (FY12: 2.9%) could therefore be exceeded in light of the continuing pressures on the economy. India ‘s real GDP growth weakened by around 190bp in FY12 to 6.5%,with deceleration particularly strong in Q412 and Q113 – the impact of which is yet to be fully reflected in the India n banking system’s asset quality.
We believe that the combination of global (euro crisis and high commodity prices) and domestic (high interest rates) challenges look increasingly formidable. The government’s reduced fiscal flexibility,coupled with late monsoons – in light of agriculture’s high contribution to GDP – could further increase these pressures,a rebound from which could take longer than expected. We expect stressed assets in the system,including unseasoned restructured loans,to reach around 10% by FY13 from 6.7% in FY10.
The large government banks’ loan diversity,funding stability and access to capital means they are able to withstand significant pressure on their funded and unfunded asset exposures,and this is reflected in their standalone ratings. Medium and small government banks look relatively more vulnerable.
Nevertheless,asset-quality performance at government banks has sharply lagged behind that of the private banks,which are experiencing relatively stable asset quality. We believe this highlights the need for further strengthening of risk underwriting and monitoring mechanisms at government banks. These issues will need to be addressed as the government banks may find it hard to raise the significant capital required under migration to Basel III if they have large stocks of stressed assets.