Banking sector to stay under pressure in 2014: Fitch

The Indian banking sector, reeling under asset quality pressures, will continue to see difficult times in 2014 due to the weak macro environment, rating agency Fitch has said.

The rating outlook for Indian banks remains stable, driven by the revision in the sovereign outlook. Viability rating pressures remain, owing to weak asset quality and eroding profits.

This had hit the standalone credit profiles of various public sector banks, leading to their recent VR downgrades, Fitch said in its outlook for the banking sector next year.

The full impact of the protracted slowdown remained to be seen, Fitch said, adding it had scaled down India’s economic growth forecast for 2013-14 to 4.8 per cent (from 5.7 per cent).

The 2014-15 forecast of 5.8 per cent could mean a revival, albeit at a slow pace.

Fitch said the high inflation and interest rates were likely to lead to a rise in non-performing

loans and restructured loans.

Stressed assets (NPL and restructured loans) would peak at about 15 per cent in FY15, the agency said.

At the end of the quarter ended June 2013, these assets stood at 10.2 per cent.

Public sector banks would account for a large share of these slippages, though private banks would also see asset quality problems, Fitch said.

Infrastructure restructuring would likely gain pace, while sustained currency weakness might add to cyclical pressures, it added.

For 2012-13, the banking sector’s foreign currency exposure is estimated at 17 per cent of total loans (it stood at 12 per cent in 2007-08 and only a part of this was hedged.

On the capital adequacy of banks, Fitch said the higher Basel-III capital requirement presented a challenge, especially as the earnings profiles of banks, primarily public sector ones, were weak.