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Informist, Monday, Oct. 13, 2025

 

--Fitch: Indian banks to strengthen resilience under new RBI reforms 

--Fitch:New expected credit loss norms unlikely to put pressure on India bks 

--Fitch: India bks to see modest profit hit from expected credit loss norms 
 

NEW DELHI – The Reserve Bank of India's proposed norms transitioning to an expected credit loss accouting is unlikely to put pressure on India's banks and their profitability, Fitch Ratings said in a release Monday. The viability rating scores of Indian banks are unlikely to be affected as key risk ratios will not fall significantly, the ratings agency said.

 

"Fitch Ratings believes the Reserve Bank of India's (RBI) recent package of 21 reforms will be broadly positive for the country's financial sector, with an improved regulatory framework likely to strengthen the bank operating environment," the release said. "Effective implementation could strengthen banks' risk profiles through enhanced underwriting and risk controls."

 

The RBI released draft norms to transition to a forward-looking expected credit loss framework by Apr. 1, 2027, moving away from the current incurred-loss provisioning system. This will mandate banks to set aside more funds for potential bad loans on implementation. The RBI has sought public comments on the same by Nov. 30.  

 

The change will have slightly less impact than Fitch had anticipated in August 2024, when it had projected a hit of 55 basis points on common equity tier-I ratios at implementation and 100 bps at completion, the release said. The draft norms propose that banks will have until March 2031 to make the new provision changes. Capitalisation and leverage scores will not see meaningful pressure because of the change, especially as internal capital generation and CET-I ratios are at cyclical highs.

 

The introduction of lower risk-weights for some loan categories, such as corporate and home loans, in revised Basel-III norms effective April 2027 will further dull the impact, Fitch said. Moreover, banks have been preparing for the change for a few years now, it said. Soon after the draft norms were released, State Bank of India Chairman C.S. Setty said last week that the country's largest lender was prepared for the change, and the long transition time for implementation would help banks safeguard their balance sheets from any negative impact.

 

Private-sector banks' operating profit-to-risk weighted asset ratio will likely remain higher than state-owned banks' after the new norms are introduced, the ratings agency said. Private-sector banks have better pre-impairment profitability and the credit costs of state-owned banks are at a cyclical low, which makes them likely to rise more than private-sector peers.

 

"Indian banks' Issuer Default Ratings are underpinned by government support, and are unlikely to change -- even if VRs (vialbility  ratings) are downgraded -- so long as our support expectations remain unchanged," Fitch said.

 

The RBI's proposed expansion of allowed activities for banks are likely to give more business opportunities without a sharp rise in market risk exposure, Fitch said. The ratings agency expects underwriting and exposure limits for banks will remain conservative. The Indian central bank unveiled a series of measures giving banks greater operational leeway and allowed them into activities prohibited earlier, including lending against securities and financing mergers and acquisitions. 

 

Similarly, the withdrawal of proposed restrictions on the overlap of banks and their subsidiaries will allow greater operational flexibility. Risks will not necessarily increase as the subsidiaries are also supervised by the RBI, Fitch said.

As for the new regulations on non-bank finance companies, Tata Capital is expected to be the biggest gainer from the proposal to reduce risk weights for infrastructure lending. The company's regulatory capital requirements will reduce even as less than 10% of its loan portfolio consists of such loans, while most other rated NBFCs are not significantly exposed to such lending, Fitch said. The proposal was part of the 21 developmental and regulatory policies the RBI announced after the Monetary Policy Committee meeting outcome on Oct. 1.

 

"The removal of the 450 bp (basis point) cap over the benchmark for pricing foreign borrowings could allow lower-rated NBFIs (non-bank financial institutions) to increase foreign-currency funding, subject to market risk appetite," the ratings agency said. "Meanwhile, a proposal to allow NBFIs to raise over USD750 million ($750 million) in foreign-currency funding annually, without prior regulatory approval, should ease the process for larger offshore debt-raising."

 

At 1142 IST, shares of Tata Capital were 1.3% higher at INR 330.10 on the National Stock Exchange. The NBFC was listed on the exchanges Monday. It had reported a consolidated net profit of nearly INR 10 billion, on a consolidated revenue of INR 76.65 billion, for the June quarter.  End

 

US$1 = INR 88.76

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Reported by Aaryan Khanna

Edited by Vandana Hingorani

 

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