Indian banks burdened with bad loans?

Share of loans restructered could ballon to 8% in the coming year, warns Fitch.

Higher loan loss provisisons resulting from these stressed assets could even weaken the bottom line by 15-20% in the worst case scenario.

Still, Indian banks should withstand the shock and eventually recover as the long-term projects attached to these loans mature into profitability.

"The structural part of the problem relates to the growing concentration risk that has resulted in Indian banks having a greater proportion of stressed assets than in 2008. Exposures to the struggling sectors of aviation and state power utilities may be restructured in 2012, together with growing exposures to infrastructure projects that face teething trouble. As a result, Indian banks may see the share of loans restructured in 2011 and 2012 rising to 7%-8% of loans, significantly higher than the 4.4% seen in the aftermath of the 2008 crisis," says Fitch.

"Credit losses may however remain contained. While the immediate outlook on Indian infrastructure is negative, the long-term viability of the projects - which is still intact - may help limit credit losses. Since these exposures to stressed assets are very thinly reserved, government banks' profits may be impacted by 15%-20% due to higher loan loss provisions. Nevertheless, pre-provision operating profits of banks are seen as being adequate to absorb the rising costs, leaving equity intact," it added.