MUMBAI: The credit profile of a few Indian banks has weakened due to high single-name concentrations and stress in infrastructure loans, a study conducted by India Ratings, a Fitch group company, has found. "By mid-2012, infrastructure loans at 14.5% had replaced residential mortgage and agriculture as the single largest sector exposure of Indian banks. Together with growing corporate exposure, the resulting single-name concentration in the Indian banking system is now significant enough to generate spikes in stressed assets," the report said.
As corporate performance is affected by the weakening economic scenario, profitability and interest cover have only slightly improved since the days of the 2008 economic crisis. "A continued slowdown in demand means that corporate performance may continue to suffer till early-2013, putting further cyclical pressure on banks' asset quality," the study said.
According to India Ratings, the resultant asset quality pressures are reflected in the rise in restructured loans, which, at an estimated 6% of loans by March 2013 (restructured in 2011 and 2012), is already 1.4 times the amount of restructured loans in the aftermath of the 2008 crisis.
As corporate performance is affected by the weakening economic scenario, profitability and interest cover have only slightly improved since the days of the 2008 economic crisis. "A continued slowdown in demand means that corporate performance may continue to suffer till early-2013, putting further cyclical pressure on banks' asset quality," the study said.
According to India Ratings, the resultant asset quality pressures are reflected in the rise in restructured loans, which, at an estimated 6% of loans by March 2013 (restructured in 2011 and 2012), is already 1.4 times the amount of restructured loans in the aftermath of the 2008 crisis.
"Regulatory forbearance of restructured loans means that most of this pressure is not reflected in the reported credit cost. The government's ownership of some of the weak borrowers and viability of infrastructure projects in India help mitigate the ultimate loss expectations on some of these loans," it pointed out.
However, the study has also found that Indian banks can 'absorb stressed credit costs through profits and general loan loss reserves, leaving common equity largely unimpaired'. "Only five out of the 22 banks studied show capital impairment above 10%, with the highest reduction under stress being 36% of existing common equity. The stressed common equity Tier 1 (CET 1) ratios of 20 banks remain above 6% and only one bank (government-owned) is below the regulatory minimum of 4.5%," it noted.
However, the study has also found that Indian banks can 'absorb stressed credit costs through profits and general loan loss reserves, leaving common equity largely unimpaired'. "Only five out of the 22 banks studied show capital impairment above 10%, with the highest reduction under stress being 36% of existing common equity. The stressed common equity Tier 1 (CET 1) ratios of 20 banks remain above 6% and only one bank (government-owned) is below the regulatory minimum of 4.5%," it noted.
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