Rating agency Fitch in a report today said that Indian banks would remain resilient to face stressful conditions in the current and next financial years.
Profits of the banking system will give them ability to absorb sharp increases in credit cost, leaving the aggregated capital unimpaired, according to the report.
A stress test on 30 Indian banks, which account for 78 per cent of the banking system’s assets, indicates that capital is protected for a majority of the banks. However, some weak banks would need to raise core capital to guard against the effects of the current downturn in the credit cycle, Fitch said in a statement.
According to the report, credit cost of the banks has reached 2.28 per cent of loans compared with an annual average of 0.7 per cent during 2005-09. The assessment takes into account restructured loans and corporate lendings turning into bad loans, the largest contributor to the stress.
The increase in credit costs is based on Fitch’s estimates of potential impact of different sectors to which Indian banks are exposed, while maintaining a loan loss reserve of 60 per cent for non-performing assets (NPAs).
The report said that the stressed operating profit of banks could absorb the increased credit cost, leaving the system’s aggregate capital unimpaired.
Nine banks failed the ‘profit test’ due to various reasons such as weaker margins, high restructured loans, portfolio concentrations or a combination of all these. The impact of the profit shortfall on their Tier I capital was marginal for most of the banks and not crippling for any.
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The Reserve Bank of India's (RBI's) took counter-cyclical steps during the credit boom in 2005-08. It increased general provisioning which helped Indian banks better prepare for the downturn.
While specific loan loss provisioning for the banking system is 50 per cent of gross NPAs, it goes up to 72 per cent for the system together with general provisions. The coverage ratio will decline if it is adjusted for the restructured loans.