Mumbai: Fitch Ratings cautioned that the Reserve Bank of India's leeway to banks for restructuring loans to micro, small and medium enterprises, and the relaxation given for real estate projects are likely to defer asset quality pressures.
Fitch said the forbearance signifies a gradual shift from the regulator's earlier efforts to enhance the quality and transparency of asset classification in the banking system.
"There is a risk that such regulatory forbearance will perpetuate moral hazard, as it follows aggressive lending growth and risk-taking in certain sectors in the five years to the financial year ended March 2019," it said.
Fitch said that while it was uncertain whether the central bank would extend such forbearance to non-bank lenders, it believes the probability of this was high, considering the liquidity squeeze being seen by such lenders amid a slowing economy. It said non-banking financial institutions not being able to lend to real estate and micro, small and medium enterprises due to a liquidity crunch had taken a toll on these sectors.
The rating agency added that Indian banks had a poor track record with respect to restructuring of loans and the Reserve Bank of India's asset quality reviews conduced in 2015-16 (Apr-Mar) and 2017-18 had found that a dominant share of loans restructured post 2011-12 had degraded into non-performing loans.
Fitch acknowledged that the regulator's move to extend the restructuring of micro, small and medium enterprises loan window was aimed at supporting credit to fields that had a multiplier effect. It, however, noted that such sectors had seen above-average lending growth in the last few years and that they may face risk at times when the economy is slowing.
"Moreover, these measures are unlikely to support sustainable credit growth until capitalisation improves meaningfully across banks, in particular among state-owned banks, which account for nearly two-thirds of the sector's assets," Fitch said.
The central bank, at its recent monetary policy committee meeting, had extended the one-time window for restructuring loans to micro, small and medium enterprises to December from March-end. It also allowed banks to net off fresh amount of loans given to home and automobile buyers and small-scale firms against their deposit base used to calculate the cash reserve ratio.
