Rising risk appetite may affect some Banks’ intrinsic credit profiles: Fitch

Fitch Ratings said in a report that the rise in risk appetite among Indian banks highlights the importance of assessing the ability of individual banks to withstand expected and unexpected balance sheet pressures as part of an analysis of their intrinsic creditworthiness.

The growth of bank loans during the fiscal year ending in March 2023 (FY 23) reached 15.4 percent, which is the highest rate since FY 2012.

“We believe this partly reflects pent-up credit demand in the wake of the COVID-19 pandemic, as well as strong nominal GDP growth, and we expect some normalization in FY24,” the global ratings agency said on Thursday.

However, the rapid growth of loans and increased exposure to certain asset classes is also likely to indicate an increase in risk appetite and may affect risk profiles, adding that the increase in risk appetite partly reflects banks’ efforts to boost returns after higher financing costs during 2022, even as they manage Asset growth relative to capital.

Notably, credit card and personal loan lending rose to 10.2 percent of system loans by fiscal year 2018, from 7.5 percent in fiscal 2018, he said.

“We view these unsecured classes as being most vulnerable to potential stress, although exposures between our rated entities remain manageable, and improvements in risk controls and loan books should help reduce the risk associated with any future deterioration in asset quality compared to We also expect tighter regulatory oversight to slow unsecured lending in the coming year.”

The rate of exposure to non-bank financial institutions in the services sector also increased, from 6.5 percent of the total system loans in FY 2018 to 10.5 percent in FY 23.

Funding pressures and asset quality risks among non-bank financial firms have eased since the sector went through a period of stress in 2019. These loans are also to well-established private and state-owned entities, so carry less risk than unsecured lending.

However, non-bank financial firms, such as banks, are also increasing their risk appetite. It expects banks to continue lending to this sector, but at a slightly slower pace as more banks face regulatory sector concentration caps.