Recovery eases concern over restructured loans
Financial Express, January 14, 2010, Page 13
fe Bureaus, Mumbai
The asset quality concerns, stemming from the surge in restructured loans of Indian banks in 2008 and 2009, have eased as economic activity continues to improve, according to Fitch Ratings.
Of the Rs 1.2-lakh-crore non-performing loans (NPLs), restructured loan portfolio is estimated at 15-25%, which could lead to a moderate one percentage point increase in the gross NPL ratio of the Indian banking system, up from 2.4% registered at the end of September 2009.
Fitch estimates that these NPLs will peak in the next fiscal ending March 2011, by when close to 75% of restructured loans are expected to mature, and the resulting increased credit cost could impact return on assets (ROA) on an average by a modest 13bps.
Four industries—textile, infrastructure, commercial real estate and steel—account for nearly half of the total restructured loans. Since the larger private banks have relatively lower exposure to these industries, the extent of restructuring among private banks (2% of loans) is markedly less than that of government banks (5%).
The increase in loan loss provisions on the new NPLs will impact banks, not only because of the low level of existing provisions on the restructured loans (2%) but also due to the new regulatory requirement on Indian banks to maintain a minimum specific loan loss reserve of 70% of gross NPLs.
Fitch has therefore applied the enhanced 70% specific loan loss provisions on all incremental NPLs to calculate the impact on bank profitability.
The reduction in FY11 ROA varies from one bp to 34 bps (FY09 ROA: 1.02%) depending on the respective bank's extent of restructured loans.
The corresponding effect on tier 1 ratio (both from reduction in earnings and increased risk weights on NPLs) varies from one bp to 54 bps, and is not expected to impact the credit profile of the banks given the system's adequate tier 1 ratio of 8.9% at FY09.
In December 2008, the Reserve Bank of India relaxed loan restructuring guidelines to help corporates with long-term viability to weather the economic slowdown and liquidity crunch. During FY09 and Q10, Indian banks on average restructured 4.4% of loans, up from 0.71% in FY08.
Financial Express, January 14, 2010, Page 13
fe Bureaus, Mumbai
The asset quality concerns, stemming from the surge in restructured loans of Indian banks in 2008 and 2009, have eased as economic activity continues to improve, according to Fitch Ratings.
Of the Rs 1.2-lakh-crore non-performing loans (NPLs), restructured loan portfolio is estimated at 15-25%, which could lead to a moderate one percentage point increase in the gross NPL ratio of the Indian banking system, up from 2.4% registered at the end of September 2009.
Fitch estimates that these NPLs will peak in the next fiscal ending March 2011, by when close to 75% of restructured loans are expected to mature, and the resulting increased credit cost could impact return on assets (ROA) on an average by a modest 13bps.
Four industries—textile, infrastructure, commercial real estate and steel—account for nearly half of the total restructured loans. Since the larger private banks have relatively lower exposure to these industries, the extent of restructuring among private banks (2% of loans) is markedly less than that of government banks (5%).
The increase in loan loss provisions on the new NPLs will impact banks, not only because of the low level of existing provisions on the restructured loans (2%) but also due to the new regulatory requirement on Indian banks to maintain a minimum specific loan loss reserve of 70% of gross NPLs.
Fitch has therefore applied the enhanced 70% specific loan loss provisions on all incremental NPLs to calculate the impact on bank profitability.
The reduction in FY11 ROA varies from one bp to 34 bps (FY09 ROA: 1.02%) depending on the respective bank's extent of restructured loans.
The corresponding effect on tier 1 ratio (both from reduction in earnings and increased risk weights on NPLs) varies from one bp to 54 bps, and is not expected to impact the credit profile of the banks given the system's adequate tier 1 ratio of 8.9% at FY09.
In December 2008, the Reserve Bank of India relaxed loan restructuring guidelines to help corporates with long-term viability to weather the economic slowdown and liquidity crunch. During FY09 and Q10, Indian banks on average restructured 4.4% of loans, up from 0.71% in FY08.
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