In order to stabilize from negative for fiscal 2021-2022, India Ratings and Research revised its outlook on the overall banking sector on Monday, even as it sees higher stress emerging in the retail loan segment going forward. The outlook for public sector banks (PSBs) has been revised to positive from negative, and the agency appears to have a stable outlook for private banks. The total stressed assets (gross non-performing assets + restructured assets) were expected to increase by 30% for the banking system; the increase in the retail segment was almost 1.7 times in the second half of FY22.
The agency’s Director Jindal Haria said that the last few months have given banks the opportunity to strengthen their provisions for legacy stressed assets that existed before the pandemic. According to agency, they predict that the provisions will grow to almost 75-80% on those NPAs by the end of F21. This will allow the bank space to absorb stress from COVID. With the reform in accounting standards in last year, allowing public sector banks (PSBs) to cover their profit and loss balance sheets with a share premium account, major banks will be able to collect additional Tier 1 capital on their own. The Agency also updated its forecasts of credit growth to 6.9% from the previous 1.8% in FY21 and 8.9% in FY22.
It reported that approximately 1.24% of the total bank book is under NPA Performa incremental and approximately 1.75% of the total bank book could be restructured by the end of FY21. According to the agency, there has been an incremental stress solely due to the COVID-19 pandemic and does not involve the slippages in the usual course of business that banks will experience. Haria also said that a lot of the retail stress will be more seen in private sector banks than public sector banks that come from unsecured advances and also because of their higher exposure to unsecured loans. From the previous 1.8 percent, the agency also updated credit growth forecasts to 6.9 percent for FY21, and projected 8.9% for FY22. The stock of stressed retail assets for public bank could rise from 2.1% in FY21 to 2.9% in FY22, while it could rise for private banks from 1.2% to 4.3%.
Via a bottom-up analysis of stressed companies using two filters, sales above Rs 100 crores and interest coverage below 1.5x, the agency measured stressed corporate assets as a percentage of gross bank credit that decreased from 15.7 percent at the end of FY20 to 15.3 percent at the end of 1-HFY21. Low slippages, write-offs of 0.9% and no growth advances in the first half of FY21 are the main reasons for the reduction. As credit growth revives and capital market flows are strengthened, the agency expects deposit rates to increase.
By taking advantage of their lower deposit rates, large banks would be able to draw higher ranked customers, the agency said, adding that having an asset profile comparable to a large bank would be difficult for mid-sized or small-sized banks.
