Tag: icra

Banks see revival from July, tank up capital to meet loan demand, BFSI News, ET BFSI

Banking & Finance

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Banks are hoping for revival from the next month as Covid infections and lockdowns ease and have started raising capital to meet the likely loan demand jump.

State-owned Indian Bank has raised Rs 1,650 crore through the QIP launched earlier this week. In March this year, the committee of directors of capital raising of the bank had accorded approval for raising equity capital aggregating up to Rs 4,000 crore through QIP in one or more tranches.

State Bank of India has received its board’s approval to raise Rs 14,000 crore through the issuance of additional tier 1 capital.

Kolkata-based Uco bank has received a board approval for Rs 500 crore tier 2 issue, over and above an earlier approval for up to Rs 3,000 crore through share sales.

Bank of Maharashtra has received shareholders’ approval to raise up to Rs 5,000 crore equity capital through various modes, including rights issue and preference issue.

The shareholders approved the proposal at the bank’s annual general meeting (AGM) held on June 24, 2021, through audio/visual means.

Banks see revival from July, tank up capital to meet loan demand

Gradual recovery

The non-food year-on-year credit growth was recorded at 5.7% as on June 4, slower than 6.2% seen a year back, Reserve Bank of India data showed. This reflects risk aversion from both borrowers and lenders. However, bankers and brokerages are expecting an uptrend here on.

“We continue to believe that credit growth will bounce back in the near-term from the short-term ‘second wave’ disruption,” HDFC Securities said in a note earlier in the month. The credit demand is primarily expected from the retail segment as seen in earlier months while corporate demand is likely to be muted.

Corporate credit growth is likely to be subdued as companies are still deleveraging and may not go for capex soon.

“Corporate willingness for new investments remains low currently as the economy is still recovering from the devastating second wave. Investment scenario is tepid as gauged by new investment announcements, which saw 67% decline in FY21 as per CMIE,” SBI’s economic research said.

Banks are better placed this year to support credit growth with as many as 12 public banks reporting annual net profit in FY21 after five consecutive years of losses. “Apart from trading gains, the return to profitability was supported by lower credit provisions on their legacy non-performing assets, after the high provisions made during the last few years,” ratings company Icra said.

Experts see the revival to be gradual in the second quarter and expected to be much better from September, aided by good monsoon and festive season.

The demand for credit would likely come from the retail and micro, small and medium enterprises segments.



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After five years of losses, PSBs reported net profits in FY21: ICRA

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Public sector banks (PSBs) reported net profits in FY21 after five consecutive years of losses, supported by windfall treasury gains, according to ICRA. However, gains are likely to be much lower in FY22, given limited headroom for further decline in bond yields.

The credit rating agency estimated that the 12 PSBs booked profits of ₹31,600 crore from this source, compared to the overall Profit Before Tax (PBT) of ₹45,900 crore in FY21.

Trading gains

Notably, the trading gains for PSBs in FY21 exceeded the capital infusion of ₹200 billion received from the Government of India (GoI).

Notwithstanding the profits reported by the public banks in FY21, the agency said the PBT of other PSBs (excluding State Bank of India/SBI) at ₹18,400 crore were lower than their trading gains (₹25,500 crore), reflecting the challenges posed by Covid-19 on the asset quality and profitability of the banks.

ICRA observed that higher gains were recorded by PSBs on the back of relatively higher statutory liquidity ration (SLR) holdings compared to private sector banks (PvSBs).

Public sector banks losing market share in loans to private sector rivals

“The onset of Covid-19 resulted in windfall gains for public (sector) banks with trading profits on their bond portfolios rising sharply after the steep cut in policy rates by the Reserve Bank of India (RBI) in March 2020,” said ICRA in a note. Bond yields declined sharply in FY21 amid policy rate cuts following the onset of Covid-19.

Repo rate

The repo rate and the reverse repo rate were cumulatively cut by 115 basis points (bps) and 155 bps, respectively, during March 2020 and May 2020 to 4.00 per cent and 3.35 per cent, respectively, by May 2020.

Anil Gupta, Vice President – Financial Sector Ratings, ICRA, said: “As the banks booked gains on their bond holdings, their fresh investments are closer to the market rates, thereby aligning the yield on their bond portfolios closer to the market rates.

“The yield on the investment book for the public banks declined to 6.18 per cent in Q4 (January-March) FY21 from 6.79 per cent in Q4 FY20.”

Public sector banks support for Covid-19 health infra gathers pace

While banks make windfall profits amid the declining yield scenario, they could face challenges in their bond portfolios in a rising interest rate regime, opined Gupta.

“While the RBI is unlikely to be in a rush to hike interest rates in the near term, banks would need to be mindful as treasury profits would be relatively muted in FY22,” he said.

Like PSBs, PvSBs saw an improvement in their trading profits to ₹18,400 crore in FY21 (₹14,700 crore in FY20), which was 21 per cent of their PBT in FY21 (28 per cent in FY20), the note said.

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Barring a few like Essar, banks have lost 80% dues in top NCLT resolutions, BFSI News, ET BFSI

Banking & Finance

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The resolution of Videocon Industries close to the liquidation value has put the spotlight on realisations through the Insolvency and Bankruptcy Code mechanism.

Bankers have lost over Rs 40,000 crore in the Videocon account, as Anil Agarwal’s Twin Star snapped the company for less than Rs 3,000 crore.

In over 363 major NCLT resolutions since 2017, banks have taken an average haircut of 80% over the past four years, the largest among them being Deccan Chronicle (95%), Lanco Infra (88%), Ushdev International (94%) and Zion Steel (99%).

While RBI has pointed to a recovery rate of 45% in IBC so far, barring the recovery rates in the top nine accounts, recoveries in other accounts average 24%. The top nine accounts were from the steel sector which led to good recoveries, while accounts in the power and infrastructure sectors struggle for buyers.

Lenders have been able eke out good recoveries in steel sector, with the highest being in the case of Essar Steel where lenders got 90% of their dues.

Fiscal 2021 drop

The realisation for financial creditors from IBC declined significantly in FY2021 with a total resolution amount of around Rs 26,000 crore, which is almost a quarter of the realisations in fiscal 2020.

The pandemic has increased operational challenges for the various parties involved in a CIRP, which resulted in limited cases yielding a resolution plan. The suspension of new proceedings under the IBC for the entire FY21 resulted in a sharp slowdown in the resolution process.

Out of the total 4,300 cases that have been admitted to bankruptcy courts since FY17, only 8% has been resolved and nearly 40% of the cases are still pending. About 30% of the cases have seen liquidation.

From its commencement in December 2016, 4,376 CIRPs have been admitted, of which 2,653 were closed till March 2021,

About 40% of the cases admitted by the NCLT were closed on appeal or settled or withdrawn under Section 12A which highlights that at least some promoters have been more willing to pay their dues to keep the IBC proceedings at bay. The extent of cases being referred to liquidation remains high at about 40% and only a quarter of such cases have seen the liquidation process come to a conclusion. The average realisation through liquidation has been a mere 3% of the claim amount.

Fiscal 2022 hopes

Although rating agency ICRA estimates that financial creditors could realise about Rs 55,000 crore to Rs 60,000 crore in FY2022 through successful resolution plans from the IBC. The higher realisation by the financial creditors would depend on the successful resolution of 8-9 big-ticket accounts, as more than 20% of ICRA’s estimated realisation for the year could be from these alone.



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Travel, tourism, retail may be the next bad loan fronts for Indian banks, BFSI News, ET BFSI

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As banks were clearing off the bad assets in their corporate loan cupboards, they may be staring at another bout of bad loans.

This time the stress is emerging from retail loans, which have been the banks’ mainstay for the last few years as corporate loans declined. The contact intensive travel and aviation sectors are also likely to give pain to banks if the Covid situation worsens.

Loans to travel and hospitality

As of April 23, 2021, banks loans to tourism, exports and restaurants stood at Rs 50,395 crore as against Rs 47,101 crore a year earlier, a rise of 7 per cent. The growth rate was less than half of the 18 per cent jump in the previous 12 months.

The total bank loans to the aviation sector as of April 23, 2021, stood at Rs 26,309 crore, up 8.2% year on year.

Retail loans

There has been a “sharp decline” in collection efficiencies in retail asset pools across asset classes in May due to the second wave of the pandemic, with microlenders witnessing a dip of up to 20 per cent, a report said on Monday.

“ICRA has observed a sharp decline in the collections of its rated securitisation transactions in April 2021 (i.e. May 2021 payouts), following the rise of Covid cases and imposition of lockdowns/movement restrictions which has impacted the operations and collection activities of the NBFCs and HFCs,” the report from domestic rating agency ICRA said.

The microfinance entities have witnessed the highest decline in collection efficiencies, pointing out that repayments of advances and overdue collection were lower by 20 per cent for April when compared with March.

The agency added that collections for SME loan pools and commercial vehicle loan pools also fell significantly from the heights achieved in March 2021.

Housing loans and loans against property have remained the least impacted and most resilient as was seen last fiscal given the association of the borrower with the underlying collateral and the priority given by borrowers to repay such loans, it said.

RBI measures

The Reserve Bank of India (RBI) has created a special liquidity window of Rs 15,000 crore with a tenor of 3 years at the repo rate to provide liquidity support to the contact-intensive sectors hit by Covid-19.

The special liquidity window encourages banks to provide fresh lending support to hotels, restaurants, tourism, aviation ancillary services, and other services including private bus operators, car repair services, rent-a-car service providers, event/conference organisers, spa, clinics, and beauty parlours/saloons.

These sectors have seen the biggest impact due to the second wave as authorities started imposing lockdown measures to curb the spread of the virus



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With just 24% recovery rate, IBC lags other mechanisms, BFSI News, ET BFSI

Banking & Finance

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The Videocon resolution, which yielded less than 10% for lenders, has brought back recovery woes in the Insolvency and Bankruptcy Code mechanism in the spotlight.

Bankers have lost over Rs 40,000 crore in the Videocon account, as Anil Agarwal’s Twin Star snapped the company for less than Rs 3,000 crore.

While RBI has pointed to a recovery rate of 45% in IBC so far, barring the recovery rates in the top nine accounts, recoveries in other accounts average 24%. The top nine accounts were from the steel sector which led to good recoveries, while accounts in the power and infrastructure sectors struggle for buyers.

Recoveries from earlier resolution mechanisms resulted in a loss of nearly 70%.

Fiscal 2021 drop

The realisation for financial creditors from IBC declined significantly in FY2021 with a total resolution amount of around Rs 26,000 crore, almost a quarter of the realisations in fiscal 2020.

The pandemic has increased operational challenges for the various parties involved in a CIRP, which resulted in limited cases yielding a resolution plan. The suspension of new proceedings under the IBC for the entire FY21 resulted in a sharp slowdown in the resolution process.

Out of the total 4,300 cases that have been admitted to bankruptcy courts since FY17, only 8% has been resolved and nearly 40% of the cases are still pending. About 30% of the cases have seen liquidation.

From its commencement in December 2016, 4,376 CIRPs have been admitted, of which 2,653 were closed till March 2021,

About 40% of the cases admitted by the NCLT were closed on appeal or settled or withdrawn under Section 12A which highlights that at least some promoters have been more willing to pay their dues to keep the IBC proceedings at bay. The extent of cases being referred to liquidation remains high at about 40% and only a quarter of such cases have seen the liquidation process come to a conclusion. The average realisation through liquidation has been a mere 3% of the claim amount.

Fiscal 2022 hopes

Although rating agency ICRA estimates that financial creditors could realise about Rs 55,000 crore to Rs 60,000 crore in FY2022 through successful resolution plans from the IBC. The higher realisation by the financial creditors would depend on the successful resolution of 8-9 big-ticket accounts, as more than 20% of ICRA’s estimated realisation for the year could be from these alone.



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ICRA: Uncertainties with rising Covid cases could compound NBFCs woes

Banking & Finance

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The resurgence of the Covid-19 pandemic is likely to impact the performance of assets under management of retail NBFCs in 2021-22, rating agency ICRA said on Wednesday.

“Domestic Retail-NBFC AUM are facing asset quality headwinds which will moderate growth in 2020-21 and is also likely to affect their performance in 2021-22, following resurgence of the Covid-19 pandemic,” it said in a statement.

Higher loan losses seen

Asset quality pressures would play out fully in this fiscal as the level of economic activities are yet to substantially pick up over the pre-Covid levels, with risks further compounded by recent rise in infection rate, it further said.

While NBFCs can proceed with the overdue recoveries post lifting of the Supreme Court order on the NPA classification in March 2021, ICRA notes that performance of most of the key target asset and borrower segments continues to be sub-optimal, which would impact realisations leading to higher loan losses.

“Entities have augmented their provisions steadily since the fourth quarter of 2019-20 and are currently carrying provisions of more than 50 per cent of the pre-Covid levels, the same is expected to be maintained at least for a few more quarters in view of the current uncertainties,” it said.

AM Karthik, Vice President, Sector-Head Financial Sector Ratings, ICRA, said, “Restructuring expectation averages around 2.6 per cent (ICRA sample of large NBFCs) presently and we expect reported Gross Stage 3 to increase steadily by about 50-100 basis points (over December 2020 levels) by March 2022, as a base case; and could inch-up further if the impact of the pandemic continues for longer period leading to lockdowns or other tighter restrictions.”

Revival in growth

ICRA expects the Retail-NBFC AUM, which is estimated to be about ₹10-lakh crore as of December 2020, to have grown by three to five per cent in 2020-21 as pent-up demand, post the lockdown, led to some revival in segments such as namely gold, microfinance, two-wheelers, and tractors.

In 2021-22, growth is expected to revive to about eight per cent to 10 per cent driven by improvement in demand from all key target segments compared to last fiscal.

Growth, however, would be contingent upon access to adequate funding lines, it further said, adding that the capital structure is expected to remain adequate.

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Banks want debt recast scheme back as Covid wave intensifies, BFSI News, ET BFSI

Banking & Finance

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Banks have sought an extension of one-time debt recast scheme as the curbs after fresh Covid wave are likely to increase defaults and affect asset quality.

The bank chiefs have petitioned RBI to extend the scheme introduced last year in a meeting with the governor earlier this week, according to reports.

No relief measures

Banks, which got protection and support by a swift moratorium on loans when the pandemic first struck, have no such cover this time.

As the second wave intensifies, most of the relief measures and schemes announced by the government and Reserve Bank of India have expired. On top of it, the central bank is non-committal on moratoriums.

In today’s conditions, there is no need for a moratoriumRBI governor Shaktikanta Das

Also, a spike in overdue loans after the lifting of the moratorium has been worrying analysts.

“The level of loans in overdue categories has increased after the moratorium has been lifted and the impact on asset quality will be spread over FY2021 and FY2022 as various interventions and relief measures have prevented a large one-time hit on profitability and capital of banks,” ratings agency Icra said in a report.

What Fitch says

Banks want debt recast scheme back as Covid wave intensifies

India’s second wave of Covid infections poses increased risks for India’s fragile economic recovery and its banks, says Fitch Ratings. It already expects a moderately worse environment for the Indian banking sector in 2021, but headwinds would intensify should rising infections and follow-up measures to contain the virus further affect business and economic activity.

Fitch forecasts India’s real GDP growth at 12.8% for the financial year ending March 2022 (FY22). This incorporates expectations of a slowdown in 2Q21 due to the flareup in new coronavirus cases but the rising pace of infections poses renewed risks to the forecast. Over 80% of the new infections are in six prominent states, which combined account for roughly 45% of total banking sector loans. Any further disruption in economic activity in these states would pose a setback for fragile business sentiment, even though a stringent pan-India lockdown like the one in 2020 is unlikely.

Challenging environment

The operating environment for banks will most likely remain challenging against this backdrop. This second wave could dent the sluggish recovery in consumer and corporate confidence, and further suppress banks’ prospects for new business (9MFY21 credit growth: +4.5% as per Fitch’s estimate), it said. There are also asset quality concerns since banks’ financial results are yet to fully factor in the first wave’s impact and the stringent 2020 lockdown due to the forbearances in place. We consider the micro, small and medium enterprises (MSME) and retail loans to be most at risk, the rating agency said.

Retail loans have been performing better than our expectations but might see increased stress if renewed restrictions impinge further on individual incomes and savings. MSMEs, however, benefited from state-guaranteed refinancing schemes that prevented stressed exposures from souring.

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Banks are without a raft in Covid storm, BFSI News, ET BFSI

Banking & Finance

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Banks, which got protection and support by a swift moratorium on loans when the pandemic first struck, have no such cover this time.

As the second wave intensifies, most of the relief measures and schemes announced by the government and Reserve Bank of India have expired. On top of it, the central bank is non-committal on moratoriums.

“In today’s conditions, there is no need for a moratorium”RBI governor Shaktikanta Das

Also, a spike in overdue loans after the lifting of the moratorium has been worrying analysts.“The level of loans in overdue categories has increased after the moratorium has been lifted and the impact on asset quality will be spread over FY2021 and FY2022 as various interventions and relief measures have prevented a large one-time hit on profitability and capital of banks,” ratings agency Icra said in a report.

No standstill

Banks enjoyed a standstill on classifying loans as non-performing last fiscal and also accounted for interest accrued despite not receiving payments during the quarter. Both these leeways will no longer be available after the final SC order in March.

As a result, bank NPAs are likely to spike and they may have to reverse some interest earned on loan accounts above Rs 2 crore as the SC order has directed banks to charge simple and not compound interest on loans between March and August 2020.

It is estimated that banks could face a hit of between Rs 7,000 crore to Rs 10,000 crore due to the reversal of interest as it is unclear whether the government will reimburse this waiver – as it earlier did for small-ticket advances.

Analysts will watch out whether banks will provide for the write-back on compounded interest as directed by the ape court or adjust it through their Covid 19 provisions already accounted for.

Fourth quarter

The banking sector had got back to some sense of normalcy in the fourth quarter as collection efficiency came close to or at pre-Covid levels and loan growth recovered.

However, a resurgence in Covid cases, leading to localised lockdowns in various states will force banks to look out for risk mitigation.

There is a likelihood of delayed recovery in credit offtake after the Covid spike. Analysts expect the banking sector loan growth to recover to 6% to 7% in the fiscal ending March 2021 mainly due to a growth in retail loans in the second half of the year. Large lenders with a wider network are expected to clock in a higher year on year increase with a double-digit increase in credit growth.

While banks may not have any impact on margins as they have not cut deposit or MCLR based rate, higher liquidity on the balance sheet could decline. Treasury income may also drop on sequential basis as 10-year Gsec has risen by about 28 basis points during the quarter.

The silver lining

The only respite for banks is their gross non-performing assets may not jump as estimated by RBI’s fiscal stability report.

Icra sees the NPA ratio at 9.5-9.7% as of March-end, lower than RBI’s estimate of 12.5% for the same period.
The RBI’s Financial Stability Report (FSR) of December 2020 has stated that banks’ gross non-performing assets (GNPAs) may rise sharply to 13.5 per cent by September 2021, and escalate to 14.8 per cent, nearly double the 7.5 per cent in the same period of 2019-20, under the severe stress scenario.

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Government not inclined to bear loan moratorium costs, BFSI News, ET BFSI

Banking & Finance

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The government is not inclined to bear the burden arising of the recent Supreme Court judgement on a blanket waiver of compound interest or interest on interest on all loan accounts which opted for moratorium during March-August 2020.

“They (banks) are well-poised to handle this and we don’t see any space for government relief,” said a senior government official.

The government has already compensated banks for the interest on interest they had lost on loans outstanding below Rs 2 crore. Analysts estimate the additional cost to reimburse banks for all loans at Rs 7,000-10,000 crore.

“There is no directive from the court ordering the government to bear this cost,” the government official said on the condition of anonymity.

Since there is no deadline to refund the compound interest they have charged, banks can stagger the payment depending on individual account period and other conditions. A final call would be taken shortly, he said.

In its ruling last week, the Supreme Court refused to extend the moratorium beyond August 31, 2020 but directed lenders to waive interest on interest for all borrowers.

According to ICRA estimates, the compounded interest for six months of moratorium across all lenders was around Rs 13,500-14,000 crore, and the relief already extended over loans up to Rs 2 crore had cost the exchequer about Rs 6,500 crore.

A Macquaire research report has put the additional amount at around Rs 10,000 crore.

On account of the stress due to the Covid-19 pandemic, the Reserve Bank of India had announced the loan moratorium scheme to grant temporary relief to borrowers for payment of instalments due between March and August 2020.

The apex court in its judgement observed that the government and the central bank would decide on economic policy based on expert opinion. It further said a waiver of complete interest was not possible as it would affect depositors. The court ruled out an extension of the period of loan moratorium and any specific sector-wise relief.

According to Crisil Ratings, standstill on recognition of non-performing assets (NPAs) had tied the hand of lenders and consequently impacted the credit discipline of borrowers.

“Withdrawal of the same will enable lenders to enforce various legal measures and support their recovery efforts,” it said in a note.



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Bank NPAs likely to shoot up during January-March quarter, BFSI News, ET BFSI

Banking & Finance

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The Supreme Court’s decision on Tuesday to lift the moratorium on the classification of bad loans is likely to see banks classifying more overdue loans as non-performing assets (NPAs) in the January-March quarter.

The move will lead to an improvement in collection efficiencies as banks can take legal action to recover their dues. It will also bring clarity on the real impact of the pandemic on asset quality.
Banks and non-banking finance companies have reported non-performing assets numbers on a proforma basis for the past two quarters.

The real picture of the banking will be visible from March quarter. We are all keen to see how the December and March quarter goes. Till then the major focus will be to manage the portfolio till March,” said B. Ramesh Babu, MD & CEO, Karur Vysya Bank in an interview with ETBFSI in December.

He added, we are very clear, we don’t want to postpone the problem. If a borrower couldn’t service the loan even pre-covid and its aggravated now, there is no point in restructuring that account. We have decided to bite the bullet and declare that as an NPA.

The real picture of the banking will be visible from March quarter. We are all keen to see how the December and March quarter goes. Till then the major focus will be to manage the portfolio till March.B. Ramesh Babu, MD & CEO, Karur Vysya Bank

As on December 31, banks reported gross NPAs at around Rs 7.4 lakh crore. Following the Supreme Court’s order, banks can now recognise loans worth Rs 1.3 lakh crore as NPAs in January-March, which will raise the tally to Rs 8.7 lakh crore.

According to ICRA’s estimates, in the absence of the SC’s standstill order, the gross NPAs (GNPAs) of the banks stood at Rs 8.7 lakh crore, or 8.3% of advances. This, as against the reported GNPA of Rs 7.4 lakh crore (7.1%) as on December 31, 2020.

“Hence, in absence of a standstill by the Supreme Court, the GNPAs for the banks would have been higher by Rs 1.3 lakh crore (1.2%) and net NPAs would have been higher by Rs 1 lakh crore (1%)

The focus of the many banks is to deal with the current challenges than the growth,

“We had earlier stated that we will keep a pause button on the growth because we were not comfortable with the way the things were panning out,” said, N. Kamakodi, MD & CEO, Citi Union Bank.

We had earlier stated that we will keep a pause button on the growth because we were not comfortable with the way the things were panning out.N Kamakodi, MD & CEO, City Union Bank

Collection efficiencies

“Post the judgment, we believe that lenders will report actual non-performing assets in January-March, net of write-offs instead of pro forma NPAs, and that the availability of legal recourse, including SARFASEI Act, should improve collection efficiency,” brokerage Emkay Global Financial Services said.

It said that actual recognition of NPAs would lead to margin compression for banks due to the reversal of accrued interest on NPAs.

However, most banks have made provisions on proforma NPAs, which they will be allowed to write back. This will not lead to any large impact on the balance-sheets of most lenders. Also, proforma NPAs are falling, while the provision coverage ratio has improved by an average of 300 basis points to over 70% for private banks and above 65% for public sector banks in the same period.

The proforma numbers

Following the Supreme Court (SC) stay order, banks have not tagged overdue loans as NPAs since August 2020. However, they have been listing such loans as portfolio-level proforma NPAs. For example, the actual bad debt for Axis Bank at the end of December 30, 2020, was 4.55% of its total loans while it reported NPAs of 3.44%. For Bank of Baroda the actual NPA was 9.63% but it reported 8.48%. In the case of Canara Bank, the actual NPA was 8.95% and the reported one was 7.46%.

The silver lining is this is just 16% more than the currently recognised NPA level, not any huge rise as modelled by the RBI stress tests.

RBI stress tests

Reserve Bank of India, in its financial stability report in January, had said that if the economic scenario were to worsen into a severe stress scenario, the bad loans could rise to 14.8% of the loans. For public sector banks, the rate could go up to 16.2% under a baseline scenario and 17.8% in a severe stress one.

In 2011 too, banks had started accumulating bad loans after a lending binge between 2004 and 2010, but they did not declare these bad loans as bad immediately. Only after an asset quality review in mid-2015, the banks started recognising them as bad and unearthed a big mountain of NPAs.



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