Banking System NPAs Could Reach 8-9% By FY22 End, Crisil Says
Indian banks’ gross non-performing assets (NPAs) could reach 8-9% by the end of this fiscal year (FY22), 50-150 basis points higher than FY21 levels, but well within below FY18 levels when APMs peaked at 11.2 percent, rating agency Crisil said in a research note.
In addition, stressed banking sector assets could reach 10-11%, assuming 2% of assets will be restructured by the end of fiscal 22, the rating agency said.
Projections are based on the assumption that the Indian economy will grow 9.5% this year and that there will be continued improvement in the credit quality of businesses. However, if there is a third wave of the coronavirus pandemic (Covid-19), posing challenges to demand growth, there may be significant downside risks to the estimates made.
On the other hand, if the National Asset Reconstruction Company Limited (NARCL) or “bad bank” as it is commonly called, is operationalized during this tax system, then the NPAs in the banking system could fall further.
The retail segment, which is incidentally one of the top performing segments for banks, has shown signs of stress during the Covid-19 pandemic as both salaried and self-employed borrowers face income issues and to higher medical expenses, especially during the second wave. The rating agency says stressed assets in the retail segment could reach 4-5% by the end of FY22, up from 3% in FY21, despite the foreground such restructuring put in place by the Reserve Bank of India (RBI) for retail borrowers, which followed a six-month moratorium on repayments in the first wave of the pandemic.
The rating agency’s assessment suggests home loans will be the least affected segment, but unsecured loans will come under strain due to the Covid-19 pandemic.
Likewise, the MSME segment, despite the measures put in place by the central bank and the government, will see its portfolio of stressed assets increase to 17-18 percent by the end of FY22, from 14 percent. during FY21. Additionally, this segment may experience the most significant restructuring as it will be critical to managing the segment’s cash flow. According to Crisil, the MSME segment could undergo a restructuring to 4-5% of the loan portfolio.
Krishnan Sitaraman, Senior Director and Deputy Director of Rating, Crisil Ratings, said: “Retail and MSME segments, which together make up around 40% of bank lending, are expected to see an increase in APNs and stressed assets. this time. Stressed assets in these segments are expected to grow to 4-5% and 17-18%, respectively, by year-end. The numbers would have been even higher without write-offs, mainly in the unsecured segment ”.
On the other hand, the corporate segment, which worried the banks a few years ago, should resist.
“Much of the stress in the portfolio of companies had already been recognized during the asset quality review initiated five years ago. This, coupled with the age-old trend of deleveraging, has strengthened corporate balance sheets and allowed them to weather the pandemic relatively unscathed compared to retail and MSME borrowers, ”the rating agency said.
In addition, restructuring in the corporate segment has been very low, about 1 percent of the loan portfolio. Therefore, stressed assets in the corporate segment are expected to represent around 9-10% of the loan portfolio at the end of FY22.
The rural segment, which was hit hardest during the second wave of the Covid-19 pandemic, also experienced a strong recovery. Therefore, stressed assets in the agriculture segment are expected to remain relatively stable, Crisil said.
“While the performance of the restructured portfolio will certainly need to be watched closely, the slippages of the restructured portfolio should be lower this time around. Recent trends indicate that a reasonable proportion of borrowers, mostly from the personal side, have started making additional payments as their cash flow improves, despite having benefited from a restructuring. MSMEs, however, may take longer to stabilize and we remain vigilant, ”said Subha Sri Narayanan, Director of Crisil Ratings.