A tight monetary policy, increased consumer leverage and an appreciating rupee could impact the immediate prospects of the banking sector, international rating agency Fitch Ratings has said.
“Asset quality has come under some pressure, particularly in consumer loans that grew rapidly in the past and has now started to season, forcing banks to re-examine the loss assumptions in some parts of the business,” the international rating agency said in Indian Banks — Annual Review and Outlook, a report released on Wednesday.
“The appreciation of the rupee against the US dollar could affect the smaller exporters of textiles; banks have reportedly restructured some of their exposure to this segment in 2007-08,” the report added.
Fitch said that it is "likely to be increasingly cautious" in its near-term outlook on the performance of Indian banks, but added that the banks would continue to benefit from the growth opportunities given their dominant status as financial intermediaries. The strong investment cycle currently underway is the new growth engine for bank credit, it said.
“Non-performing liabilities (NPLs or bad loans) ratios will remain under focus, particularly in consumer loans where rising interest rates and increased consumer leverage has affected borrowers' repayment capacity, leading to growing delinquencies in the unsecured loan portfolio,” the rating agency said.
Asset quality in residential mortgage loans (accounting for about half the retail loan portfolio) has held steady, but that could be vulnerable if rising interest rates are accompanied by a correction in property prices.
Fitch said though net income of banks grew 25 per cent year-on-year during April-September 2007 or H108 (against 24 per cent in 2006-07), on the back of loan growth and lower mark-to-market depreciation on government securities portfolios, the rise in net interest income was more sedate at 11 per cent, reflecting the pressure on net interest margins.
“The slowdown in loans growth in 2007-08 together with any increase in loan loss provisions, could therefore affect net income,” it added.
The ability to raise timely capital could remain a key differentiator between banks, with increased capital charges for operational risk and the need for government banks to make additional provisions for pension liabilities.