Poor assets of banks worries Fitch IBCA

MUMBAI, NOV 2: The Indian government's inability to `radically' reform the banking system is a drag on the country's sovereign rating and...

MUMBAI, NOV 2: The Indian government’s inability to `radically’ reform the banking system is a drag on the country’s sovereign rating and the credit rating of its banks, international credit rating agency Fitch IBCA said on Tuesday.

"Political reality makes radical restructuring unlikely, with the result that banking sector’s weakness will continue to constrain both the banks’ and the sovereign’s credit ratings," the rating firm said in a statement.But it added that while India’s financial system had poor asset quality, it did not have many of the problems faced by other countries. The loans to GDP ratio in India was 39 per cent unlike over 100 per cent in many other Asian countries, it said.

India’s banks also had a negligible portfolio of real estate loans or share-collaterised lending while large statutory liquidity requirements ensured that loans were only 42 per cent of the total assets for the commercial banking sector.

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Fitch IBCA has estimated gross non-performing assets (NPAs) at between 26-30per cent of gross loans, while net NPAs to total assets were at a more manageable 8.5 per cent. Much of poor asset quality was on account of debtor-friendly foreclosure and bankruptcy laws, which allowed debtors to default with impunity, the rating agency said.

Recapitalisation costs for government banks and financial institutions was expected to cost between $ 5.9 billion to $ 10.3 billion, the statement added. Fitch IBCA viewed privatisation of state-run banks inevitable and said it expected the government to make significant progress on this front in the next two years. "Some consolidation in the banking system is also expected during the next five years," it said.

But before that banks will need flexibility to cut jobs, close unprofitable branches and the setting up of an Asset Reconstruction Company for a one-time clean up of bad loans. Fitch IBCA said it expected the central bank to shed its role as an owner of banks in favour of a supervisory role. The RBI (Reserve Bank of India) is the largestshareholder of the country’s largest bank, the State Bank of India, with nearly 60 per cent stake.

The NPA level of the banking system has already touched Rs 45,000 crore. The financial performance of banks and financial institutions were affected in the current year by the high level of NPAs. Many banks and FIs had written off huge amounts towards NPAs. Most of these loans are stuck in steel, textile and chemical projects and some loans were rescheduled.