Lengthy process a major impediment in resolution of bad loan cases: Fitch
India’s lengthy legal processes remain a major impediment to the implementation of an effective framework for bankruptcy and resolution of bad loan cases, says a Fitch Ratings report. The report further says that the “bad bank” that was incorporated in July 2021 has not played a meaningful role so far, observed
National Asset Reconstruction Company Ltd (NARCL), or the bad bank, was has been set up as a strategic initiative to clean up the legacy stressed assets with an exposure of Rs 500 crore and above in the Indian Banking system.
The report further says that rapid loan growth and higher exposure to certain asset classes is also likely to indicate greater risk appetite, amid stiff competition, which could raise sectoral risk if not managed carefully.
Indian banks’ loan growth over FY23 reached 15.4%, the highest since FY13. Fitch Ratings believe the growth could partly be because of pent-up credit demand following the pandemic, amid improved capacity for growth, especially among private-sector banks, as well as strong nominal GDP growth.
“India’s private credit/GDP, at around 57% in 2022, is already moderately higher than the median for sovereigns in the ‘BBB’ category, of 50%,” says the report.
On a positive note, the report says that the operating environment (OE) for Indian banks has strengthened as economic risks associated with the Covid-19 pandemic have ebbed.
“A number of prudential indicators for the sector have also improved compared with pre-pandemic levels, though growing risk appetite in a relatively benign OE highlights the importance of appropriate buffers against potential stress,” says the report.
Fitch revised its OE mid-point score for Indian banks to ‘bb’ from ‘bb+’ in March 2020, after assessing that the pandemic was likely to worsen the existing OE stresses facing the sector. India was badly affected by the pandemic, but the associated risks have now receded. Fitch affirmed the sovereign’s rating at ‘BBB-/Stable’ in May and it has forecast real GDP growth to average 6.4% annually in the three years to March 2026 (FY23-FY25), putting India among the fastest-growing sovereigns in our rated portfolio.
The report further noted that the sector’s average common equity Tier 1 (CET1) capital ratio rose to 13.4% by FYE23, from 10.4% in FYE18. This partly reflects around $50 billion in cumulative fresh equity provided by the sovereign to state banks since 2015.
Earnings buffers also appear significant, with operating profits equivalent to around 2.8% of risk-weighted assets by our estimate in FY23, up from 0.6% in FY20.
The report further notes that the large size of the economy and India’s favourable demographics should offer banks opportunities to generate profitable business and diversify risk and revenue. It also expects banks to benefit from the gradual formalization of the SME sector, through initiatives such as the Goods and Services Tax and rapid digitalization, which will improve the prospects for providing services at acceptable levels of risk to this substantial part of the market.
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