Banking Sector Net NPA May Improve To 3.2% By March-End, ICRA Says
Indian five hundred rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Banking Sector Net NPA May Improve To 3.2% By March-End, ICRA Says

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Aided by better recoveries and declining slippages, overall net non-performing assets of the banking sector are likely to improve to 3.2-3.3 percent by the end this fiscal from 3.7 percent in September 2019, ICRA said in a report.

Net NPAs of banking sector stood at 3.8 percent as of March 2019.

"Asset quality for the banking sector continues to improve with declining slippages and expected improvements in recoveries during fiscal year 2020 even though loan write-offs continue to remain at elevated levels," the rating agency said.

A recent Reserve Bank of India report on trends and progress of banking sector showed that recovery of stressed assets improved during FY19 propelled by resolutions under the Insolvency and Bankruptcy Code, which contributed more than half of the total amount recovered.

Banks recovery from bad loans had improved by 15.5 percent in FY2019 from 14.9 percent in FY2018.

The rating agency said the decline in net NPAs will improve the solvency profile of banks, with core equity bettering to around 29 percent by March 2020 and nearly 27 percent by March 2021 from 33 percent as on Sept. 30.

The report said with sizeable capital infusion in public sector banks and accelerated provisions, their net NPAs declined sharply to 4.8 percent as on Sept. 30, 2019 from 7.2 percent as on September, 2018 and 4.9 percent as on March 31, 2019.

Private lenders net NPAs improved to 1.7 percent as on Sept. 30, 2019 from 1.9 percent as on Sept. 30, 2018, but were marginally higher than 1.6 percent as on March 31, 2019.

Also read: Banking Industry’s NPA Situation To Improve By Fiscal-End: SBI Chairman

The report said with reduction in net bad loan levels, credit provisions for banks are expected to decline to 1.6-1.8 percent of advances in the current fiscal and 0.8-0.9 percent during FY2021 from 3.6 percent during FY2019.

The decline in the credit provisions will largely be driven by state-run banks with their provisioning declining to 2.1-2.3 percent in FY2020 and to 1-1.1 percent in FY2021 from 4.4 percent during FY2019.

The report further said the year-on-year growth in bank credit is expected to decelerate sharply to 6.5-7 percent in FY2020 from 13.3 percent in FY2019, following limited incremental credit growth the current fiscal till date.

"The incremental bank credit has increased by only Rs 0.80 trillion during FY2020 till Dec. 6, 2019 to Rs 98.1 trillion, in contrast to the rise of Rs 5.4 trillion and Rs 1.7 trillion during previous corresponding periods of FY2019 and FY2018, respectively," the rating agency said.

Even in a high growth scenario, whereby incremental credit rises to Rs 6.5-7 trillion during the second half of FY2020, the rating agency projects a 40-45 percent y-o-y decline in incremental net bank credit to Rs 6.3-6.8 trillion during FY2020 from Rs 11.9 trillion during FY2019.

On the capital front, the report said the state-run banks' incremental capital requirements for 6-8 percent growth in risk weighted assets and increasing regulatory requirements will remain limited at Rs 10,000-20,000 crore for FY2020.

The government has announced a capital infusion of Rs 70,000 crore in state-run banks for FY2020, of which Rs 59,800 crore have been infused during September 2019, including Rs 4,557 crore in IDBI Bank.

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