Indian banks' NPL ratios not to breach 5 per cent mark in near term: Fitch

09 February 2009

The Indian banks' systemic gross non-performing loan (NPL) ratio, which stood at 2.3 per cent at end-2008, may not surpass 5 per cent in the next 12 months to early 2010 even after adjusting for bad loans that are restructured during this period, noted Fitch Ratings in its report Indian Banks - Annual Review and Outlook.

This is because, the banks are showing greater operational efficiencies, improved loan origination and monitoring systems, and better creditor rights leading to faster and increased recovery expectations, it said. NPL ratios of many banks are currently at historical lows. Overall, rising NPLs could affect the performance of Indian banks, although any sharp deterioration in their credit profile is not expected. Banks that have concentrations to vulnerable sectors, including commercial real estate, textiles and other export-led sectors, may come under pressure, particularly as external capital sources may remain limited for a while, the report added.

According to the report, the loan portfolio of Indian banks is fairly well diversified, with the single largest sectoral exposure to residential mortgages amounting to about 11 per cent of total loans. Corporate loans increased by 56 per cent between May 2007 and December 2008, the growth being more than double that for consumer loans during the same period.

Infrastructure projects account for the largest proportion of banks' corporate portfolio and have come up against cost and time overruns, to rising input prices and the drying up of domestic equity and offshore funding sources. The increased credit demand stems from extended working capital cycles, particularly for oil companies, as well as for ongoing funding needs of expansion projects that are currently unable to raise equity or overseas borrowings due to global economic downswing.

However, loan growth is expected to fall due to slowdown in industrial activity, reflecting the gloomy economic scenario. The infrastructure sector may affect Indian banks' asset quality in the long term, particularly in the event of a prolonged slowdown, although Fitch is not expecting an impact from this in the immediate future.

Growth in consumer loans slowed down in FY09as rising interest rates and lower affordability squeezed demand. Delinquencies in construction equipment and commercial vehicle financing have risen over the same period. There has been a rise in the number of non?performing residential mortgage loans, although the impact may be more visible if property prices were to correct even further, leading to lower or even negative equity for the borrower, the report said. About 90 per cent of loans in this sector are to owner?occupiers and may have a limited immediate impact on borrower delinquency unless job losses were to affect credit quality; mortgages taken for investment purposes are likely to suffer higher delinquencies.