Mumbai: While lauding the Indian authorities’ recent measures to clean up bad loans in the banks, US-based rating agency Fitch said the move would put pressure on banks’ profitability in the short term.
“In the short term, this is likely to create provisioning costs that will mean continued pressure on bank profits, 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,” Fitch said while adding that the resolution of bad assets will be a dominant theme in the sector over the next few years.
The resolution of non-performing loans is likely to require significant haircuts if the re-priced loans are to attract attention from private investors and asset reconstruction firms.
Fitch said state banks, which hold the bulk of stressed assets are likely to report low returns on assets for FY17 and any material recovery is likely to be delayed as resolution crystallises losses and forces a higher level of provisioning. Further losses at some of the weakest small to medium-sized state banks could pressure them to shrink or to exit the system by entering into forced mergers.
However, it noted that the increased powers given to the RBI to clean up asset quality and to intervene in banks at an earlier stage when risks build represents an important positive step towards ensuring a healthy system in the future.