Acknowledging India’s efforts to deal with the rising bad loan problems, the credit rating agency, Fitch ratings has said that the Indian authorities are taking more concerted push in solving the bad loan problems, though it also said that the move may impinge on banks’ profitability in the short-term and it is possible that further losses will push some weaker banks closer to breaching minimum capital requirements, unless they receive pre-emptive capital injections.
In its latest report ‘Prospects for bad Loan clean-Up at Indian banks improving’, the agency noted that asset resolution will be a dominant theme in the sector over the next few years. Besides, it also said that in case of some of the weakest small- to medium-sized state banks, the further losses could pressure them to shrink, or to eventually exit the system by entering into forced mergers, adding that the authorities should manage this in a way that is least disruptive for the financial system, but the process will entail risks for investors of capital securities, at least in the case of weakest banks.
Fitch ratings further said that the increased powers given to the Reserve Bank of India (RBI) to clean up asset quality, and to intervene in banks at an earlier stage when risks build, represents an important positive step toward ensuring a healthy banking system in the future. It added that RBI direction that pushes banks into initiating insolvency processes against borrowers could help to break a deadlock caused by concerns among bank officials that decisions on troubled borrowers will attract investigation by anti-corruption agencies. However, it also pointed that there will be significant implementation challenges, but asset resolution is likely to strengthen over the next few years.