'Stress tests show PSBs can handle 15% NPAs'

Mayur Shetty,TNN | Dec 7, 2013

MUMBAI: India Ratings, an affiliate of international rating agency
 Fitch, has said that ratings of public sector banks in India will 
never fall below AA- even if banks turn in losses. The agency
 has said that its stress tests show that theIndian banking
 system can withstand non-performing assets (NPAs) of even up to 15%.

"Our ratings floor for public sector banks is AA- because of 

government support. While the extent of government shareholding 

does not make a difference, the strategically important banks

 are more likely to get timely support," said Atul Joshi, MD & CEO,

 India Ratings and Research.

According to Joshi, India is the only country in the world where 

no bank has gone bust. "There have been bank mergers but 

depositors have not had to take a haircut," he said.

"There is too much noise in the global arena on the high level 

of non-performing assets and restructured loans with talks of 

non-performing loans going up to 4-6% and restructured loans

 for up to 8-10%," said Joshi. According to him, the concern 

is misplaced because Indian banks have many hidden strengths

 which do not get measured while being compared internationally.

"We measure countries based on macro prudential indicators, 

which are a measure of macro risks such as asset price bubbles.

 India ranks number one, which is the lowest risk, as against

 China and Indonesia which are at number 3, the highest level 

of risk," said Joshi. "Indian banks are better off compared to its 

peers on other counts such as capital adequacy ratio, loan to 

deposit ratio and bank assets to GDP ratio," said Joshi.

According to him, the biggest weakness among Indian banks

 was their 'single-name concentration' - loan accounts that

 account for a large chunk of a bank's share capital.

The other risks that Indian banks face are defaults on accounts

 of cyclical credit risks in industries such as textiles, steel and 

cement, and thirdly on account of exposure to large infrastructure 

projects.

"We conducted a stress test on Indian banks taking into account 

all these factors and also factored in a reduction in profits and 

capital. Several large banks would continue to report profits if 

Indian bank NPAs rose to 15%, many banks would turn in a loss 

but only four-five small banks would require a bailout of around

 $2 billion," said Joshi. For gross NPAs of Indian banks to rise 

to 15%, they will have to more than triple from their present

 level of around 4.5%.

The other hidden strength, according to Joshi, is the real estate

 holding of Indian banks. "Indian banks have huge real estate

 holdings in terms of apartments and office buildings. 

The market value of these assets is several times higher

 than what is reckoned in their books," he said. In recent 

years, international banks have generated hundreds of crores 

of cash by liquidating their real estate assets.