Tag: banking sector

In the quarter-ended September 2020, the GNPA ratio of scheduled commercial banks improved to 7.7% against 9.3% in the year-ago period. India’s banking sector did see a decrease in its gross non-performing assets (GNPA) owing to the moratorium offered by the Reserve Bank of India (RBI) and due to recoveries and higher write-offs by the multiple banks.

Going forward, some believe the stressed asset formation outlook is anticipated to be more benign than what was earlier expected. “The biggest change in outlook has been the formation of stressed assets which, at the start of the pandemic, we had anticipated to be around 10-12% of banks’ loan books. However, based on our recent channel checks with rating agencies, corporate banking heads of banks, consultants and also feedback from KV Kamath Committee, we expect overall stressed asset formation to halve to 5-6%,” said a report by Macquarie Research.

One of the biggest reasons for this is lower restructuring in the corporate segment. Macquarie pointed out that many large corporates haven’t sought restructuring and only a dozen large companies (with exposures greater than Rs 15 billon) have opted for it restructuring. It, however, expects the retail NPLs to increase in the next few quarters and can touch a 10-year high. “We draw comfort from the fact that collection efficiencies (CE%) from September to December 2020 have been high in the mid-90s, despite 40% of the loan book under moratorium as of August 31, 2020. Hence, we have reduced the credit cost estimates cumulatively for FY21E-FY23E by 150bps for private sector and 120bps for PSU banks to 550bps and 650bps, respectively,” it added.

Meanwhile analysts at BofA Securities have also turned hopeful. Anand Swaminathan, Research Analyst, BofAS India, said, “Asset quality is no longer an existential risk in mid-2020, Indian banks’ asset quality has been surprisingly resilient. Our channel checks further support few risks of negative surprises near term. Moreover, new disbursals are already back to above pre COVID levels in most segments. After NPA recognitions are dealt with in 1H, we expect growth tailwinds to emerge in 2H.”

He also believes that capital and liquidity have never been better, and this should help cushion downside risks from asset quality and net interest margins and help further consolidate market share gains in 2021. Further, multiple government and regulatory measures have been a major help for asset quality in 2020 and this will support the growth revival in 2021, he added.

Swaminathan, however, noted new NPA formation could throw some surprises, and this may disturb the pace of growth recovery.

In fact, last week, RBI came out with its Financial Stability Report, in which it said banks’ GNPA may rise to 13.5% by September 2021, from 7.5% in September 2020 under the baseline scenario. The GNPA ratio of PSBs may increase from 9.7% in September 2020 to 16.2% by September 2021; that of PVBs (private banks) to 7.9% from 4.6% in 2020; and FBs’ (foreign banks) from 2.5% to 5.4%, over the same period. Under the baseline scenario, it would be a 23-year-high. The last time banks witnessed such NPAs was in 1996-97 at 15.7%, showed the RBI data.

And in case of severe stress scenario, the GNPA ratios of PSBs, PVBs and FBs may rise to 17.6%, 8.8% and 6.5%, respectively, by September 2021. The GNPA ratio of all SCBs may escalate to 14.8%. This highlights the need for proactive building up of adequate capital to withstand possible asset quality deterioration, said the report.

Most experts view the performance of financial sector will remain under pressure on account of lack of credit uptake, risk aversion, lower fee income and covid-related provisioning, but some banking analysts have predicted light at the end of the tunnel.