RBI proposals on loan recast will increase transparency: Fitch Ratings

NEW DELHI: Global rating agency Fitch today said RBI proposals on treatment of restructured loans would increase transparency and be positive for the Indian banking system amid economic slowdown.

Among others, a RBI working group recently recommended increased loan-loss provisions and ultimately ending forbearance on asset classification, and instead recognising these stressed assets as non-performing in line with internationally practices.

Fitch Ratings said treating restructured loans as non-performing would help report the real credit cost of Indian banks, and encourage them to price the risk into these loans more accurately.

"The proposal is timely, as banks may end up restructuring more loans in two years - FY12 and FY13 - than they had in the last 10 years, due to the slowdown in economic growth and single-name concentration in the struggling aviation and state power utility sectors," it said.

The agency said a large proportion of restructured loans are to state-owned companies in sectors undergoing structural reform.

State ownership and government involvement reduces the loss expectation in these loans, it said. However, earlier classification as non-performing may encourage banks to take a harder look at their risk profiles and step up monitoring.

"It could also encourage the government to provide more timely support to these entities to avoid any credit squeeze in the event these accounts become non-performing," Fitch added.