Outlook 'stable' for Indian banks despite challenges, says Fitch

Fitch Ratings says that the outlook for Indian banks remains stable in 2012, premised on domestic economy recovery in 2012, together with the government's continued commitment to maintain a minimum Tier 1 ratio of 8 per cent for its banks (73 per dent of system assets).

While this is a base-case scenario, a build-up in credit concentration and weakening asset quality reflect mounting downside pressures, the ratings agency said in a new sectoral outlook report, 2012 Outlook: Indian Banks, Challenges Greater than 2008 Crisis.

Part of the credit problem is cyclical and may ease with a lag if GDP growth picks up from mid-2012 on the back of lower interest rates to stimulate demand, as the Reserve Bank of India may look to loosen monetary policy if core inflation eases.

However, should the economic slowdown continue through most of 2012, the resulting problems relating to asset quality could hurt banks' stand-alone credit profile and their viability ratings (VR).

The structural part of the problem relates to the growing concentration risk that has resulted in Indian banks having a greater proportion of stressed assets than in 2008.

Exposures to the struggling aviation and state power utilities sectors may be restructured in 2012, together with growing exposures to infrastructure projects that face teething trouble. As a result, Indian banks may see the share of loans restructured in 2011 and 2012 rising to 7 per cent - 8 per cent of loans, significantly higher than the 4.4 per cent seen in the aftermath of the 2008 crisis.