Banks and non-bank lenders are likely to see a spike in their stressed assets in the current fiscal period, as slower economic activity amid the coronavirus pandemic could impact borrowers’ debt service, a report said. The spike in reported non-performing assets (NPAs) would be reflected in the coming quarters, rating agency Icra said.
GDP growth is expected to slow to 2 percent in the fiscal year 2020-21, assuming 4.4 percent in 2019-20.
“Pressure on asset quality for banks and non-banks (NBFCs) is expected to increase in FY21, despite the three-month moratorium the Reserve Bank of India (RBI) provides to borrowers for their loan repayments,” said the head of the rating group (ratings from the financial sector) Karthik Srinivasan told reporters through a webinar.
He said that the actual increase in the number of NPAs for banks and NBFCs will be known after a few days. Last week, the Reserve Bank of India (RBI) issued a relief package for private borrowers and businesses by announcing a three-month moratorium on the payment of all loans maturing between March 1, 2020 and May 31, 2020.
“We expect that the stress on asset quality is likely to be reflected with a delay of 1-2 quarters after the lifting of the moratorium and that stress will vary across segments,” he said.
In the case of banks, he said, the NPA generation will increase compared to a previous expectation of bad loan moderation. “Credit costs will remain high and recoveries will be reduced for banks,” he added. The gross slippage rate for state banks is likely to be 4.5-5 percent, and the provisioning coverage ratio (PCR) may drop to 57-60 percent, the rating agency said.
“The solvency profile of PSBs will decrease from 53% to 53% from the current level of 51%,” said Srinivasan. Private sector banks are likely to see a gross slippage rate of 4-5 percent and a drop in PCR to 60-62 percent in the current fiscal year.
As businesses are hit by an economic slowdown and slowdown in economic activity, NBFCs are expected to take a cautious approach to fresh business and focus on strengthening liquidity, he said. “Asset quality mitigation and higher supply requirements for Stage 1 and 2 assets will drive up NBFC credit costs, which are likely to increase by 50 to 100 percent in the coming quarters,” he said.
NPAs for NBFCs are likely to increase by 50-100 percent from their current levels in the coming quarters, depending on the asset class. “We expect that non-banks will further increase their focus on bank loan financing in the short term, which could boost banks’ credit growth,” said Srinivasan.
The rating agency said that amid financing challenges, higher liquidity on the balance sheet and uncertainty about asset quality, private credit institutions are likely to remain cautious about new payouts, while public sector banks (PSBs) may be constrained by their capital position and merger bottlenecks.
With low credit growth, a likely increase in credit costs and a deterioration in excess liquidity, the profitability (RoA) of financial sector entities in FY21 is expected to be negatively impacted by 50-90 basis points. With the recent cut in policy rates by RBI and small government savings rates, banks are expected to cut their deposit rates by about 50-70 basis points in FY21 for a year, Icra said.