Fitch frowns at banks' retail product pricing

Banks may not have adequately priced consumer products to take care of a possible credit loss in retail lending, Fitch Ratings said in its report 'Indian banks: Improved Performance in Recent Years'.

Despite an improvement in the median loan loss reserve coverage ratio over the last couple of years, "incrementally in pricing loans especially consumer loans, assumptions made may not be supported with adequate data," said Ananda Bhoumik, senior director, Fitch Ratings.

Owing to competitive pressures, banks are justfying disbursements at lower rates, feeling that such loans are secured and safe. However, the question more is to do with the ability to follow up on recoveries, said Bhoumik. "

Consumer banking is a new business for most banks," he added. The Reserve Bank of India (RBI) has also expressed concern on the pricing of retail loan products especially on the home loan front.

Though Bhoumik does not anticipate that mis-pricing of products would rock banks' balance sheet, "profit assumptions may need to be revised".

Fitch Ratings' report highlighted that between fiscal 2002 and fiscal 2004, the reported median loan loss reserve coverage ratio improved from 44 per cent to 62 per cent.

This is as the median reported net non-performing loan (NPL) ratio halved during this period to 2.6 per cent. "This was largely owing to disbursements made to home loans, though there is a need to prune systems," said Bhoumik.

"While the improvement in asset quality is noteworthy, banks will need to upgrade their credit appraisal and monitoring systems," stated Fitch's report.

Most banks' solvency ratios also improved and the median reported net NPL to equity ratio declined to 22 per cent from 46 per cent in the same period, stated Fitch report.

Meanwhile, mergers and acquisitions are likely to be triggered as Indian banks look to strengthening their balance sheets in order to conform to stringent Basel II norms, which come into effect in 2007.

Further, the Basel II guidelines will call for the need for capital, and Fitch pointed out that aside from consolidation in the sector, the government should also look at reducing its holding.

The banking system is today fragmented with a median asset size of $5 billion, making most banks relatively small by global standards.