Fitch Ratings today said that majority of Indian banks appear resilient to the mounting asset quality pressure and have reasonable buffer to withstand stress. The rating agency, however, cautioned that credit quality of domestic lenders is expected to deteriorate further in coming quarters.
It expects the banking system's gross non-performing loan ratio to expand to 4.2% in the current financial year from 3.75% in 2011-12.
"Asset quality is likely to remain under pressure at least for the next three to four quarters, particularly from the infrastructure sector in which banks' exposures are concentrated…Fitch's stress test on Indian banks suggests reasonable resilience in the Indian banking system to absorb a higher level of stress. Core equity for most banks is unimpaired as both profits and general reserves remain adequate," the rating agency said in a statement today.
Most large government and private banks have passed its stress test, Fitch noted.
A few banks, especially the mid-sized lenders, with high asset concentration and weak equity are more vulnerable. "This leaves their viability ratings vulnerable to downgrade if exposure to stressed assets continues to rise without a corresponding increase in equity buffer," Fitch said.
The rating agency said meeting the large capital requirements under Basel III, if not planned well, may lead to numerous banks competing to raise funds on the capital market at the same time.
According to Fitch the bulk of stress in infrastructure is residing in restructured assets and will not be visible in the reported non-performing loan numbers where pressures are largely cyclical.
"Restructured assets in 2011-12 were significantly higher than during the last restructuring exercise in 2008-09. Fitch believes that stressed assets (including restructured assets) for the system will likely exceed the agency's 10% estimate for 2012-13," it said.