‘Fin units may continue to face challenges’

With deceleration in growth and tight liquidity conditions, the country's financial institution sector may continue to face challenging operating environment, according to a report by Fitch Ratings.

It said the stress in nonbanking financial companies, small and medium enterprises (SMEs) and the real estate sector will continue to put asset-quality pressures on financial institutions in the country.

"The Indian financial institutions (FIs) sector will continue to face a difficult operating environment amid the macroeconomic slowdown and weak funding conditions," the rating agency said in a note on Wednesday.

The rating agency expects the real GDP growth to slow to 4.6% in 2019-20 from 6.8% in 2018-19, led by a squeeze in credit availability from non-banking financial institutions (NBFIs) and deterioration in business and consumer confidence.

However, the real GDP growth may rebound to 5.6% in 2020-21, it said.

The report said assetquality tensions are likely to intensify if stresses on non-banks, real estate and SMEs remain unresolved.

Idiosyncratic stress in the telecom sector has also pushed up asset-quality risks for banks, which are vulnerable due to weak capital and income buffers, it said.

"The potential for contagion for banks, thus, exists as a result of their direct exposure to NBFIs as well as the second-order economic impact of being exposed to the sectors that are adjusting to the credit squeeze as the NBFIs cut back exposure," the rating agency said.