Fitch expects bad loans and credit costs of Indian banks to increase in future

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Indian banks’ improved financial metrics do not fully reflect the impact of the coronavirus pandemic, Fitch Ratings said. According to the US-based credit rating agency, the operating environment remains challenging as the industry attempts to balance a slowly recovering economy while maintaining moderate loss absorption cushions.

On Monday, in his latest research report, Fitch said he expects bad loans and credit costs to rise as forbearance conditions and easy liquidity ease. Fitch believes that state-owned banks are more vulnerable than private banks, given their participation in aid measures, while their profits and capital reserves are low.

Data provided by Fitch highlighted that the aggregate ratio of non-performing loans (NPLs) of Indian banks fell to 7.2% at the end of December 2020 (at the end of March 2020: 8.5%). Nonperforming loans exclude impaired unrecognized loans under judicial suspension, restructured loans, loans under supervision and loans in arrears for more than 60 days, which accounted for 4.2% of loans. The average contingency reserves of 0.7% of loans are insufficient to absorb the increased strains, although private banks are well above average.

Fitch sees a high risk of a prolonged deterioration in asset quality with increased pressure on loans to distressed individuals and SMEs (8.5% of loans, 1.7% government guaranteed).

Fitch said: “Private banks are better positioned to exploit growth opportunities in 2021, as their higher contingency reserves provide better resilience to earnings and capital. The average buffer of state banks between pre-provision earnings and credit costs is only 160bp compared to private banks at 340bp. “

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