Raters caution banks on further pain from sticky assets

Moody’s says Indian banks continue to face asset 
quality risks from power sector’s weaknesses

 Dinesh unnikrishnan Live Mint 19 june 2014

Mumbai: Global rating agency Moody’s Investors Service on Wednesday warned of further worsening in the asset quality of Indian banks, shortly afterFitch Ratings Inc. issued a similar warning early this week.

Indian banks could see an increase in defaults if the “poor financial profiles” of state electricity board distribution companies don’t improve, Moody’s Investors Service analyst Srikanth Vadlamani said in a note.

The agency said government measures taken over the past two years only provided temporary relief to banks with respect to loans given to power distribution companies.

According to the rater, about 20% of impaired loans at state-run banks are given to electricity distributors.

On Monday, Fitch Ratings had warned that the recent decline in bad loan levels logged by many state-run banks doesn’t indicate that the Indian banking sector is past its asset quality woes, since the economy remains weak.

“The number of new loans becoming non-performing is still close to 3x the loans recovered and upgraded at the largest state banks at end-March 2014,” Fitch said in a release on Monday.

“There is some evidence of higher recovery rates, but the write-downs and portfolio sell offs to asset reconstruction companies are likely to play a larger role in reducing reported NPLs (non performing loans),” the agency said.

Indian banks are facing tremendous pressure due to high level of bad loans on their books—mostly an outcome of a slowing economy and careless lending over years.

Total gross non-performing assets (NPAs) of India’s 40 listed banks grew toRs.2.42 trillion in the March quarter, compared to Rs.2.43 trillion in the preceding quarter, but was about 36% higher compared with the year-ago period, according to data compiled from Capitaline.

This, coupled with about Rs.6 trillion of restructured assets in the system, takes the total amount of stressed assets to Rs.8.43 trillion or close to 14% of total bank loans, according to Mint analysis.