Home > Finance > Indian banks improved performance due to delay in stress recognition: Fitch

Indian banks improved performance due to delay in stress recognition: Fitch

53 Views

The challenges posed by Indian lenders have increased due to the virulent second wave, Fitch Ratings said on Wednesday. It also said the recent asset quality numbers that show improved performance by banks are at the cost of delayed stress recognition. Fitch expects impaired loans to peak after FY23.

“Regulatory relief measures have postponed underlying asset-quality issues for now, but banks’ medium-term performance will be dented without a meaningful economic recovery,” it said.

The asset quality of banks surprised positively with decline in reported gross non-performing loan ratio at 7.6% and net NPA ratio at 2.5% at the end of March 2021. This was against 8.60% and 3.0% respectively as on March 31, 2020.

Fresh NPA generation also declined to Rs. 2.6 lakh crore in FY2021 compared to Rs. 3.7 lakh crore in FY2020, an report showed.

“The impaired loans ratio of 7.5% in FY21 was moderately better than our expectations. The ratio was supported by declining fresh bad loans as well as high levels of write- offs,” Fitch said. “Continued relief measures aimed at Covid-19 affected segments (such as micro, small and medium enterprises (MSME), retail and contact services) played a crucial role in deferring recognition of problems with asset quality.”

Return on assets improved to 0.7% from 0.2% on average as credit costs declined. State banks reported aggregate profits for the first time in five years. But, the buffer separating pre-provision profit from credit cost was only around 130 basis points compared with 300 bps for private banks.

“The available buffer can be compromised with only a small increase in stress, as most state banks have used up their contingency reserves,” the rating agency noted.

Though private sector banks exhibited superior capital flexibility in FY21, raising nearly $6.8 billion in equity from capital markets. This exceeded the $4.4 billion of capital injected into state banks, which largely rely on the state for most capital requirements.

The sector’s common equity Tier 1 (CET1) ratio improved to 12.8% as a result, but private banks have significantly better equity resilience than state banks.

Indian banks reported loan growth of around 5.5% in FY21, moderately lower than 6.5% in FY20. However, public-sector banks expanded by only 2.2%, significantly below 9.6% loan growth by 10 private banks, as per Fitch’s estimate.

Private banks gained significant market share from public-sector banks over the past decade as the latter have been hamstrung by higher impaired loans, larger losses and weaker capitalisation.

Source link

TAGS , , , ,
Hi guys, this is Kimmy, I started LicensetoBlog to help you with the latest updated news about the world with daily updates from all leading news sources. Beside, I love to write about several niches like health, business, finance, travel, automation, parenting and about other useful topics to keep you find the the original information on any particular topic. Hope you will find LicensetoBlog helpful in various ways. Keep blogging and help us grow as a community for internet lovers.