Q2 results confirm bank asset quality decline: Fitch

Non-performing loans will rise over the next year for Indian banks as the economic downturn continues, says ratings agency Fitch Ratings.

Recent asset quality trends at both large and mid-sized government banks confirm our forecast that the Indian banking system's reported gross non-performing loans (NPL) ratio will rise close to 4.2 per cewnt for the year to March 2013 (FY13).

The proportion of restructured assets, not included in the reported NPLs, has also increased sharply. The total NPL and restructured assets ratio may well exceed 10 per cent at FY13.

The average NPL ratio for the top 10 government banks is approximately 3.7 per cent. State Bank of India (SBI), which started to address its asset quality problem relatively early, reported an increase in non-performing loans to 5.15 per cent at end-September 2012, from 4.19 per cent a year ago but accompanied by a far lower share of restructured assets.

We expect SBI's NPL ratio to be one of the first to level off.

Asset quality pressure is increasingly visible at other large government banks, which have reported sharply higher NPLs in last two quarters. We believe this trend will continue with the other banks as the effect of the economic slowdown is fully reflected in their asset quality performance.