Global rating agency, Fitch ratings in its latest report has said that the Reserve Bank of India (RBI) board’s decision to restructure stressed standard assets of micro, small and medium enterprises (MSME) borrowers with aggregate credit facilities of up to Rs 25 crore is a ‘step backwards’ and the risks to the banking sector will emanate in the coming 6-9 months. It noted that relaxation of lending norms to spur growth is never a good strategy, and added that the legacy problem loans will continue to be a bigger drag on the MSME sector's asset quality until March 2019.
Talking about the RBI board's decision to extend the timeline for the full implementation of Basel 3 norms by a year, the rating agency said that the move is certainly credit negative for Indian public sector banks (PSBs) as it reflects the sector's poor capitalisation, particularly that of state-owned banks, and their inability to meet minimum regulatory requirements. It also said that there was a stand-off between the RBI and the Finance Ministry over several issues, including easier funding norms for the MSME sector, implementation of the capital adequacy norms and economic capital framework of the central bank.
According to the report, non-banking finance companies (NBFCs) continue to remain a risk as a result of their aggressive lending, especially to real estate and MSME, in the past. It may see slippages from the latter sectors (real estate, SMEs) in the near-term if challenges in terms of liquidity continue. However, it said that better rated non-banks with good track record and market reputation face much lower rollover risk as compared to ones where risks are elevated although funding costs have risen across the board.