The rapid rise in loans and high exposure to certain asset classes may affect the risk profiles of Indian banks as it indicates a greater risk appetite, Fitch Ratings said in a note on Thursday. Not only banks, but even NBFCs have also shown a rising risk appetite.
Bank loans rose at 14.6 per cent in FY23 while credit growth in the last fiscal was the highest since FY12, when credit rose 17 per cent.
This rise in risk appetite shows the importance of assessing individual banks’ ability to withstand both expected and unexpected balance-sheet stress as part of analysing their intrinsic creditworthiness, the rating agency said.
Further, even credit card lending and personal loan exposure rose to 10.2% of system loans by FYE23, from 7.5% in FYE18. The ratings agency sees such unsecured categories as most vulnerable to potential stress.
The Reserve Bank of India governor Shaktikanta Das last week, in an address to the directors of bank boards, called out the problem of “smart accounting” to conceal stress and bloat financial performance.
“It is…a matter of concern that despite these guidelines on corporate governance, we have come across gaps in governance of certain banks, with the potential to cause some degree of volatility in the banking sector,” Das said at the meeting specially convened by the Reserve Bank.
The RBI has also found banks adopting “smart accounting methods” to “artificially boost financial performance”, Das said, revealing more about the modus operandi.
Banks try to conceal the real status of stressed loans by getting two lenders together to evergreen each other’s loans by sale and buyback of loans or debt instruments, persuading good borrowers to enter into structured deals with a stressed borrower to conceal the stress, adjust borrower’s repayment obligations by using internal or office accounts, he said.
Bank boards and management should not allow such gaps to creep in, he said, adding that the RBI has taken up such matters with the banks at an individual level in the past.
Historically, a higher risk appetite has contributed to the deterioration in some Indian banks’ financial profiles, particularly when OE conditions turn less benign.
State banks were more severely affected than private banks during the last asset-quality cycle downturn, as they have lower buffers and tend to be more influenced by the government’s strategic priorities.
“The current supportive conditions may offer opportunities for banks to strengthen capital buffers further, as financial performance has improved,” Fitch said.
The impaired-loans ratio for the sector improved by roughly 200 bps in FY23, to 4 per cent, supported by higher loan growth and the write-off of legacy bad loans. Loan-impairment charges/loans too dropped to 0.7 per cent.
Lower credit costs helped to lift return on assets to 1.1%, the highest in a decade, data showed.
Fitch expects tighter regulatory supervision to slow unsecured lending in the year ahead.