Lockdown impact on NBFCs’ asset quality to be evident gradually: RBI

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As Non-Banking Financial Companies (NBFCs) have continued to disburse credit despite the pandemic, the impact of the lockdown will be evident on their asset quality gradually, said an article in the RBI’s monthly bulletin.

“NBFCs continued to disburse credit despite disruptions caused by the pandemic, albeit at a slower pace,” said the article titled ‘Performance of NBFCs during the Pandemic: A Snapshot’.

Credit performance

Incremental credit flows (on year-on-year basis) to the retail sector continued to increase in the second and third quarter of 2020-21, but at a slower pace, while services sector saw marginal increase in the third quarter last fiscal, wherein vehicle loans, gold loans, transport and tourism were the beneficial segments.

However, incremental credit to industries declined in the same period as the sector is yet to shake off the impact of the pandemic, it further noted.

“Agriculture was the bright spot with the highest growth in disbursements in the third quarter of 2020-21, however, it could be partly attributable to a favourable base effect,” the article said.

Significantly, the share of industry in the sectoral deployment of credit by NBFCs was at 61.6 per cent as on December 2020 compared to 67.4 per cent in December 2019. The share of retail loans increased to 24.5 per cent as on December 2020 from 21 per cent a year ago.

“Asset quality of NBFCs witnessed improvement in 2020-21 so far, compared to the fourth quarter of 2019-20, due to regulatory forbearance,” it said.

However, Gross Non-Performing Asset (GNPA) ratio of NBFCs was elevated in the first and second quarter of 2020-21 compared to the corresponding period in 2019-20 but in the third quarter of 2020-21, both GNPA and NNPA ratios fell compared to the third quarter of 2019-20.

“Nevertheless, the true extent of NPAs in the sector may be gauged in the upcoming quarters as the interim order by the Supreme Court on asset classification standstill was lifted in March 2021,” the article further said. Among sectors, industry witnessed sequential reduction in their GNPA ratio while GNPA ratio of retail loans remained low compared to other sectors.

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NPAs to be nebulous owing forbearance dispensations, restructuring schemes: CARE

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Non-performing assets (NPAs) of Banks this year would tend to be a bit nebulous due to the various forbearance dispensations that have been given besides the restructuring schemes that have been introduced, according to CARE Ratings.

Banks, however, have been more proactive in terms of being cognizant of the regulatory environment and the fact that there could be an increase in quantum of NPAs once normalcy returns.

“This would affect not just corporate loans but also those pertaining to the SME (small and medium enterprise) segment and retail borrowers,” the credit rating agency said in a note.

Referring to the Reserve Bank of India’s (RBI) Gross NPA projection in its latest Financial Stability Report, CARE said even the baseline scenario, which also considers the withdrawal of the regulatory dispensation, is quite high. These stress scenarios will get reflected in a sharp increase in the slippage ratio, it added.

As per the latest (January 2021) FSR, GNPA ratio of scheduled commercial banks (SCBs) could rise to 13.5 per cent by September 2021 from 7.5 per cent in September 2020 under the baseline scenario.

Cumulative provisions

Cumulative provisions made by Banks for the year (which includes for NPAs among others) was around Rs 1.78 lakh crore in these three quarters.

Per CARE’s assessment, the picture so far this year has been positive with a tendency for gross NPAs to move down both in terms of amount as well as ratio of outstanding credit.

“There was a contrarian movement in June after which there has been a decline. The decline in NPAs indicates negative slippage ratio — incremental NPAs to outstanding credit at the start of quarter,” the agency said.

GNPAs of 30 Banks rose from 7.94 per cent of gross advances as at March-end 2020 to 8.20 per cent as at June-end 2020. However, GNPAs declined to 7.72 per cent as at September-end 2020 and 7.01 per cent as at December-end 2020.

Referring to RBI’s Report, the agency said it had indicated that as of September 2020, the gross NPA ratio was above 20 per cent for gems and jewellery and construction sectors and above 15 per cent for mining and engineering. For industry it was 12.4 per cent.

“Retail had a ratio of 1.7 per cent which can be an area of concern going ahead. Further, large borrowers had a gross NPA ratio of 11.3 per cent,” it added.

Distribution of GNPAs

As per CARE’s analysis of the third quarter results of 30 Banks, only HDFC Bank had GNPA of less than 1 per cent. Eleven Banks had GNPA in the 1-4 per cent range and 7 banks had GNPAs in the 5-10 per cent range.

Five Banks had GNPAs in the 10-15 per cent range and 2 Banks had GNPAs in the 15-20 per cent range. Only one Bank had GNPA above 20 per cent.

The positive development is that all of them witnessed a decline in the gross NPA ratio during this period, the agency said.

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GNPA situation may not turn as bad, say analysts, BFSI News, ET BFSI

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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.



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RBI FSR, BFSI News, ET BFSI

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Banks‘ gross non-performing assets may rise to 13.5% by September 2021, from 7.5% in September 2020 under the baseline scenario, according to the Financial Stability Report (FSR) released by the Reserve Bank of India. 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.

These projections are indicative of the possible economic impairment latent in banks’ portfolios, with implications for capital planning, noted the report.

“While the RBI has strongly cautioned about a likely surge in NPAs in the coming months, it may not be a surprise given the current economic scenario. Banks that maintain high CRAR should be on a distinctly better footing. Meanwhile, the signs of tapering in fresh Covid-19 infections, and positive developments on the development of vaccines can help faster normalisation of economic activities. Also, it is heartening to note that the RBI remains committed to nurture growth recovery,” said Siddhartha Sanyal, Chief Economist and Head of Research, Bandhan Bank.

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.

Stress tests gauge the adequacy of capital and liquidity buffers with financial institutions to withstand severe but plausible macroeconomic and financial conditions. In the face of a black swan event such as the COVID-19 pandemic, it is necessary to tweak regular stress testing frameworks to accommodate the features of the pandemic.

“In view of the regulatory forbearances such as the moratorium, the standstill on asset classification and restructuring allowed in the context of the COVID-19 pandemic, the data on fresh loan impairments reported by banks may not be reflective of the true underlying state of banks’ portfolios. This, in turn, can underestimate the impact of stress tests, given that the slippage ratios of the latest quarter for which data is available are the basic building blocks of the macro-stress testing framework. To tide over this limitation, it is necessary to arrive at reliable estimates of slippage ratios for the last three quarters, while controlling for the impact of regulatory forbearances,” the report said.

The stress tests results also indicated that four banks might fail to meet the minimum capital level by September 2021 under the baseline scenario, without factoring in any capital infusion by stakeholders. In the severe stress scenario, the number of banks failing to meet the minimum capital level may rise to nine

At the aggregate level, banks have sufficient capital cushions, even in the severe stress scenario facilitated by capital raising from the market and, in case of PSBs, infusion by the Government. At the individual level, however, the capital buffers of several banks may deplete below the regulatory minimum.

Hence going forward, mitigating actions such as phase-wise capital infusions or other strategic actions would become relevant for these banks from a micro-prudential perspective, the report stated.



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Credit growth lags as banks chase recoveries, BFSI News, ET BFSI

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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.

State Bank of India has recoveries worth of Rs 4,038 crore and written off loans to the tune of Rs 5,617 crore. Likewise, ICICI Bank has recovered Rs 1,945 crore, written-off Rs2,469 crore.

Bank Recoveries
SBI Rs 4,038 cr
Bank of India Rs 1,172 cr
Bank of Baroda Rs 1,642 cr
ICICI Bank Rs 1,945 cr
Yes Bank Rs 1,000 cr
Bank Write-off
SBI Rs 5,617 cr
PNB Rs 4,555 cr
BoB Rs 2,553 cr
ICICI Bank Rs 2,469 cr
Axis Bank Rs 1,812 cr

On an overall basis public sector banks accounting for 75% share of GNPAs of SCBs (scheduled commercial banks) experienced a drop in the GNPA ratio to 9.3% in the Q2FY21 against 11.6% in Q2FY20 and 9.8% in Q3FY20.

However, CARE Ratings in its latest report stated that the GNPAs would have been around 0.5% to 0.6% higher had moratorium accounts been classified as NPAs.

Even RBI in it’s Financial Stability Report for July 2020 had warned that the asset quality of the financial system could deteriorate sharply, caused by the lockdown-induced disruptions to both supply- and demand-side factors.

Will lending improve in 2021?
As per the RBI’s weekly bulletin, bank credit deployment has already started to witness a decline. The credit growth decelerated to 5.8% and 5.7% during the last two fortnights, compared to last year’s level of 8.0% and 7.9%, respectively (as of November 22, 2019 and December 06, 2019).

Banks have been very selective with their credit portfolios. Sectoral deployment of bank credit has witnessed a downward trend in some crucial industries and sectors. Growth in bank credit to NBFCs declined mainly because of the base effect and risk aversion in banking system due to the COVID-19 pandemic. As for MSMEs, they did secure loans but at higher rates.

In an interview to ET Now, Suresh Ganapathy of Macquarie said, “Bank credit growth continues to languish, with similar trends observed in the NBFC space. There has been a fall in consumption demand, especially in home loans, auto and service segments; and decline in industry credit, primarily on account of risk aversion on the part of banks to lend to MSMEs.”

CRISIL expects the bank credit growth to plummet to a multi-decadal low of 0-1%. Krishnan Sitaraman, senior director at CRISIL, told ETBFSI, “This crisis is unprecedented and so will its economic fallout be, such as lower capex demand as well as lower discretionary spends, to name some. This slowdown credit offtake is significant across segments in the current fiscal. The corporate loan portfolio, which constitutes almost half of total credit, is expected to be the worst-hit, and de-grow this fiscal.” Hence, if the denominator (credit) doesn’t grow the fresh slippages will add to the NPAs, and the GNPA ratio will increase.

There is an improvement in the economy. GST and GDP numbers have shown some growth. The banks are seeing a rise in the credit applications but they are cautious. B Ramesh Babu, MD & CEO, Karur Vysya Bank told ETBFSI, “No one wants to press an accelerator button right now. Because how is it going to pan out no one knows. The current growth is a short term or long term no one knows. So wait and watch mode is preferable.”

Real picture is still awaited
The liquidity surplus in the banking system has increased in the week ended January 1, 2021 to Rs 6.21 lakh crore from Rs 5.09 lakh crore in the week ago period. As per RBI data, banks have maintained a liquidity surplus for the last 19 months. “This can be attributed to the inflow of bank deposits surpassing the outflow of bank credit. The incremental bank deposits (over March 20) have grown by 6.7% till December 18, 2020 as against the bank credit growth of 1.7%. With bank deposits outweighing bank credit flows, the banking system would continue to see a sizeable liquidity surplus in the current week, too,” said Kavita Chacko, Senior Economist with CARE Ratings.

The various liquidity infusion measures being undertaken by the RBI — OMO purchases and, the LTRO and TLTRO — have also added to the liquidity surplus.

Experts view that the performance of financial sector would remain under pressure on account of lack of credit uptake, risk aversion, lower fee income and covid-related provisioning. With the overhang of stressed assets continuing, banks will continue to focus on improving their collection efficiency and an immediate turnaround in lending activity seems unlikely.



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SBI, PNB, other Indian banks see sharp fall in NPAs; these reasons to thank for improved asset quality

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SBI alone had recoveries to the tune of Rs 4,038 crores and has written off loans worth Rs 5,617 crores.

India’s largest PSU banks — State bank of India (SBI) and Punjab national bank (PNB) — saw a significant fall in non-performing assets in the fiscal’s second quarter. SBI, which accounts for the highest share of PSU Banks’ GNPAs at 20 per cent, reported the highest asset quality improvement in the second quarter. Its GNPA ratio fell to 5.3 per cent in September 2020, compared to 7.2 per cent in the same month last year. Another large PSU bank, PNB that accounts for 16 per cent share in overall PSU banks’ GNPAs, saw a fall in NPAs at 13.4 per cent in September 2020, compared to 16.8 per cent in the last year. 

The improvement in asset quality has majorly been due to recoveries and higher write-offs by the multiple banks. SBI alone had recoveries to the tune of Rs 4,038 crores and has written off loans worth Rs 5,617 crores, according to Care Ratings. Among other PSU banks, NPAs of Bank of India fell from 16.31 per cent to 13.79 per cent on year in Q2; Bank of Maharashtra (16.86 per cent to 8.81 per cent); Indian Overseas Bank (20 per cent to 13.04 per cent); and NPAs fof UCO Bank fell from 21.87 per cent to 11.62 per cent on-year in Q2.

The net NPAs of all banks also shrank significantly to Rs 2.1 lakh crores in Q2 FY21 from Rs 4.5 lakh crores in Q2 FY19, reflecting an increase in provision coverage ratio (PCR). The aggregate provision coverage ratio of all banks rose to 80 per cent at the end of Q2, from 68.9 per cent in the previous year. The GNPA ratio of scheduled commercial banks further improved to 7.7 per cent in the quarter ended September 2020, against 9.3 per cent in the year-ago period, and 8.2 per cent in the current fiscal’s first quarter, which was largely driven by PSU banks. 

The aggregate interest income recorded a marginal increase of 0.8 per cent during Q2 due to subdued credit offtake, coupled with falling interest rates. Additionally, the falling deposit interest rate in the quarter also led to a decline in interest expense of banks by 8 per cent, compared with 9.4 per cent growth in the year-ago period.

It is to be noted that the Supreme Court has ordered all banks to not classify Covid-19 related defaults as NPAs until further notice, or else the NPAs would have been higher in the second quarter. As per disclosures by banks studied by the rating agency, the Gross NPAs would have been around 0.5 – 0.6 per cent higher if these accounts been classified as NPAs. Meanwhile, IDBI Bank and Lakshmi Vilas Bank had the highest NPA ratios of around 25 per cent in the second quarter.  

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