Banks' asset-quality risk to be moderate after RBI rate hike: Fitch Ratings

Indian banks will weather the near-term pressure of rate hikes but their loan underwriting quality will be tested, said Fitch Ratings on Thursday.

The asset-quality risk from higher rates should generally be moderate for most banks. “Mounting repayment pressure for some borrowers amid India’s interest rate hikes, particularly for micro, small and medium-sized enterprises, will test banks’ loan underwriting quality," said the agency.

“Generally, asset-quality risks from the rate hikes should be manageable for most banks. Aggregate corporate leverage has fallen back in recent years and India has a low level of household debt/nominal GDP, at 14.5% in 2021. Nonetheless, some areas could experience heightened credit stress”.

The Reserve Bank of India’s monetary policy committee increased the benchmark policy rate by 90 basis points to 4.90 per cent to tame inflation. The rating agency expects the central bank to further raise rates, whereby the benchmark policy rate is expected to be at 5.90 per cent by end-2022; 6.15 per cent by end 2023.

Higher rates will also affect securities valuations and could make it harder for banks to raise fresh capital, particularly at state banks, although wider net interest margins (NIM) will have offsetting positive credit effects, Fitch Ratings said.

Indian banks have passed on the rate hike to the borrowers, especially the loans linked with an external benchmark. Even the loans linked with the marginal cost of funds-based lending rate (MCLR) has seen rate hikes after the monetary policy committee raised the repo rate by 90 basis points. While interest rates on loans have seen upward revision, the banks have been slower in passing on the rate hikes in the deposit portfolios.

“This trend should support higher NIM, but the lack of competition for deposits may point to relatively muted demand for new credit”, the rating agency said.