Fitch Ratings said Indian authorities are making a more concerted push to clean up bad loans in the banking sector but the move would impinge on banks’ profitability in the short-term. It said that asset resolution would be a dominant theme in the sector over the next few years and further losses may push some weaker banks closer to breaching minimum capital requirements, unless they receive pre-emptive capital injections. “Recent regulatory actions in India suggest the authorities are making a more concerted push to tackle banks’ bad loan problems.
“In the short-term, this is likely to create provisioning costs that will mean continued pressure on bank profits,” Fitch said. Moreover, the clean-up exercise undertaken by the government may bring about consolidation in the banking space. “We believe it has become more likely that the number of state banks will fall in the medium term,” it said.
Banks are straddled with anywhere between Rs 9 lakh crore and Rs 12 lakh crore of stressed assets – made up of bad loans, restructured debt and advances to companies that cannot meet servicing obligations. The government earlier this month through an ordinance amended law to give powers to the RBI to order banks to initiate insolvency proceedings against defaulters and create committees to advise them on recovering NPAs.The increased powers given to the RBI to clean up asset quality, and to intervene at an early stage when risks build, represents an “important positive step” toward ensuring a healthy banking system in the future, Fitch said.
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