Rating agency Fitch on Monday said big-ticket debt recasts for airlines and struggling state power utilities in India may increase the share of restructured assets in credit to over seven per cent in 2012, compared with 4.4 per cent in 2008.
A build-up in credit concentration, a sharp increase in lending to the aviation and power sectors, and the weakening asset quality reflected mounting downside pressures, the agency said.
According to Reserve Bank of India (RBI) data, bank credit to the power sector almost doubled in the two years, rising from Rs 1,62254 crore in November 2009 to Rs 306,539 crore in November 2011.
| KEY FINDINGS * Bank credit to the power sector rose from Rs 1,62254 cr in November 2009 to Rs 306,539 crore in November 2011 * Banks may continue to see a higher level of slippages this year, as the outlook for economic growth was week * If loans to Air India were considered NPAs, it would increase non-performing assets of banks by 100 basis points * If the slowdown continues in 2012, problems related to asset quality of banks could hurt their credit profiles |
Fitch said the outlook for Indian banks in 2012 would remain stable. This was on the premise of a recovery in the domestic economy in 2012, and the government’s promise to keep the Tier-I capital adequacy ratio at least at eight per cent.
It cautioned that banks may continue to see a higher level of slippages this year, as the outlook for economic growth remained weaker than expected. The extent of deterioration in credit quality would remain understated due to restructuring of many accounts. “Thanks to restructuring, most of the credit deterioration may not be visible in the reported gross NPL (non-performing loan) figures, which could rise to 3.5 - 3.75 per cent at the end of March 2013, compared with 2.7 per cent at end-September 2011”, it said. Further deterioration could not be ruled out if corporate margins continued to shrink due to rising costs of fuel, wages, interest costs and volatile exchange rates, it added.
The risk of growing concentration led to banks recording a greater proportion of stressed assets compared to 2008. Exposures to the struggling aviation sector, along with state power utilities, may be restructured in 2012.
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According to a Moody’s report in August, if loans to Air India were considered non-performing assets, it would increase the non-performing assets by 100 basis points.
While credit concentration is a structural issue, there are a few cyclical problems as well, which may ease with a lag if growth in gross domestic product picks up from mid-2012 if RBI switches to policy rate cuts. However, if the slowdown continues in 2012, problems related to asset quality could hurt banks’ credit profiles and viability ratings.