Recent norms for non-performing assets announced by the Reserve Bank of India are likely to increase the cost of credit for banks and undermine earnings in the near term, according to rating agency Fitch.
RBI had asked banks to initiate insolvency proceedings for accounts if the stress was not resolved in 180 days. “Regulators appear increasingly impatient with the slow resolution of NPL stock…however, stronger regulatory efforts to clean-up bad loan problems, combined with planned recapitalisation of State banks, could help support a recovery in the sector over the medium term,” Fitch said on Thursday, adding an increase in liquidation would raise the likelihood of banks taking larger than expected haircuts on bad loans than they expect. “The banking system’s average loan-loss cover was around 45% at March 2017, well below our expectation that haircuts may average 75%,” it added.
