Fitch may up upgrade banking sector if govt's recap plan is well executed

Mumbai: Global ratings firm Fitch has said that it might upgrade India’s banking sector if the government does not delay capital infusion to the public sector banks.

“If the government front-loads a substantial part of the capital injection – as is generally expected - Fitch may revise the sector outlook to stable during 2018 – provided there is greater clarity on operational details and timelines associated with the recapitalisation exercise.” Fitch said in a report.

The government, in October, has announced a Rs 2.11 lakh recapitalisation plan for Indian public sector banks over the next two years to meet globally best capital norms.

Fitch has currently assigned a negative sector outlook for Indian banks. But sooner the government infuses capital, it will be significantly credit positive, Fitch said.

A continued slowdown in the pace of bad loan resolution and a sharp slowdown in credit growth has pushed the asset-quality cycle longer than envisaged. However, recapitalisation coupled with resolution of some large NPL accounts could mean that asset-quality parameters may eventually witness some stability after FY18.

Fitch expects more volatility in the sector’s NPL ratio (FY18E: 11.5%; FY17: 9.7%) in the near term, given the stress in the power sector, concerns around farm loan waivers and SMEs, as well as heightened central bank activity aimed at minimising NPL divergences across banks. “We have not factored in any benefit from NPL resolution in FY18 despite the potential for some pick-up in momentum once the envisaged capital comes in.” it said

Fitch expects only a marginal improvement in return on assets (FY17:0.4%) in the near-term as credit costs remain high. The average loan-loss cover for Indian banks is around 47%, highlighting the need for incremental provisions in the next few quarters to meet both NPL ageing and resolution-related requirements. Treasury gains and increased activity around the sale of non-core assets will provide some support, but are unlikely to offset the impact of income reversals and somewhat subdued credit growth.