Fitch Ratings says Indian banks will cancel more loans

New Delhi, December 5 () Indian banks will likely take significantly more loan cancellations to reduce bad loans in a context of growing provisions and weak recovery prospects, Fitch Ratings said Thursday.

State banks account for about 90 percent of impaired loan stocks and have cumulatively canceled about USD 30 billion in bad loans in the last three years.

The performance of Indian banks during the first half of the financial year that ended in March 2020 (1HFY20) was characterized by weaker overall growth of loans (compared to fiscal year 19) and a slow resolution of impaired loans inherited, Fitch said in a report.

However, the overall profitability of the sector became positive for the first time since 2017-18 due to the downward credit costs, he said and added that state banks reported losses, although smaller than before.

The delays in the resolution, together with the increase in the coverage of the provision for large inherited bad loans (about 90 percent) could mean that loan cancellations will continue to be high for Indian banks, particularly state banks, he said. Cancellations exceeded the recoveries and updates of nine of the 14 state banks reviewed in 1SC20, while the opposite was true for private banks.

Loan growth fell to 9 percent from 11 percent in 2018-19, Fitch said, adding that he expects overall loan growth to remain muted, with banks maintaining their precautionary position in a context of stress. of continuous liquidity for the real estate and NBFC sectors and a decelerating economy.

The growth of retail loans has been solid so far, but banks could become cautious if economic fundamentals continue to deteriorate, he said.

Fitch said he believes the government could allow a unique restructuring of real estate loans, given the serious challenges of the sector and the growing risk of default.

Large breaches of property could result in losses for NBFC direct creditors, which in turn can present risks of contagion for the sector in general, which proves the liquidity of the entire system, he said.

A recent report by JLL real estate consultants estimated that potential loans for stressed developers are around USD 65 billion.

Fitch said that the sector's index of impaired loans (9.9 percent) remained stable overall, accompanied by an improvement in the provision coverage ratio, thanks to outdated provisions against unresolved bad loans.

Credit costs for the sector fell even more from 3.2 percent of loans in 2018-19 to 2.1 percent for the first half of 2019-20, but state bank income reserves remain weak relative to credit costs (2.6 percent).

The average rate of impaired loans of state banks was well above the sector by 12.1 percent, compared with 3.7 percent for private banks.

Banks will take substantially more cancellations in an effort to reduce bad loans, as India's new unproductive loan recovery (NPL) framework has had trouble fulfilling its promise of timely resolution, leaving banks to deal with weak recoveries. and obsolete provisions, the rating agency said. The slower generation of new damaged loans has led to a downward trend in credit costs, which has resulted in a positive return in the first half of 2019-20, although it is still very weak and state banks continue to lose, He said adding more assets - quality challenges could test the resilience of this recovery, particularly for state banks where both income and capital reserves remain weak. ANZ HRS