New Delhi, December 5: Indian banks are likely to take significantly more loan write-offs against a backdrop of rising provisions and weak recovery prospects, says Fitch Ratings.
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 in bad loans in the past three years, according to a ministry release earlier this year.
The impaired-loans ratio for the first half of the financial year ending March 2020 (1HFY20) 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.
According to Fitch, the banks will take substantially more write-offs in an effort to reduce bad loans as India's 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 1HFY20, albeit still very weak and with state-owned banks continuing to make a loss.
Fitch says that 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 Common Equity Tier 1 ratio (1HFY20: 10 per cent) is 300bp below the private banks, implying that systemic stress would 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.