Indian banks' NPA write-offs to continue amid low recoveries: Fitch Ratings

Indian banks are likely to take significantly more loan write-offs against a backdrop of rising provisions and weak recovery prospects, Fitch Ratings said on Thursday.

The state-owned banks account for a dominant share (around 90 per cent) of impaired loan stock and have cumulatively written-off nearly 30 billion dollars in bad loans over the past three years.

The impaired-loans ratio for the first half of the financial year ending March 2020 (H1 FY20) was broadly stable at 9.9 per cent, as per Fitch estimates, supported by a slowdown in incremental impaired loan growth and significant write-offs.

Fitch believes the banks will take substantially more write-offs in an effort to reduce bad loans as new non-performing loan (NPL) recovery framework has struggled to deliver on its promise of timely resolution, leaving banks to grapple with weak recoveries and ageing provisions.

Slower generation of new impaired loans has led to downward-trending credit costs, resulting in profitability turning positive in H1 FY20, albeit still very weak and with state-owned banks continuing to make a loss.

Fitch said further asset-quality challenges could test the resilience of this recovery, particularly for state-owned banks where both income and capital buffers remain weak.

The state banks' average CET1 ratio (H1 FY20: 10 per cent) is 300 basis points below the private banks, implying that systemic stress will deal a significant setback to recovery of the state banks, reversing recent improvements in performance, pressuring viability ratings and posing solvency risks to the ones with the thinnest buffers.

.