Credit growth in emerging markets (EMs) is likely to slow in 2012 due to the weaker global economic outlook, policy moves by EM authorities to prevent overheating and base effects, says Fitch Ratings.

Banking systems in most EMs which experienced rapid credit growth in 2010-1H11 remain sound. However, an increase in non-performing loans (NPLs) in these markets from currently low levels is likely in 2012 as portfolios start to season.

A marked deterioration of asset quality remains a possibility in China, where credit growth remained rapid in 9M11, albeit with moderate deceleration in 3Q11, and non-deposit funding is increasingly being used to finance balance sheet growth.

In Fitch's view, loan impairment is under-reported, and capitalisation is weak. However, the agency believes that the cost of any sector recapitalisation will likely be borne by the sovereign.

Elsewhere, several EMs in Latin America (including Brazil, Colombia and Peru), Asia (India, Indonesia and Sri Lanka) and Europe (Turkey, Russia and Georgia) reported further rapid loan growth in 1H11.

However, risks are mitigated in these markets by modest loans/gross domestic product (GDP) ratios; mostly sound asset quality, capital and funding ratios; and solid GDP growth. A slowdown in loan expansion was already evident in Turkey in 3Q11, and is likely to become more visible in 4Q11-2012 in other EMs which have experienced rapid credit growth.