Banks Could Add Rs 5.5 Lakh Crore In Bad Loans In FY21, Says India Ratings
The counters in the banking hall of Punjab National Bank in New Delhi, India. (Photographer: Sondeep Shankar/Bloomberg News.)

Banks Could Add Rs 5.5 Lakh Crore In Bad Loans In FY21, Says India Ratings

India Ratings & Research estimates that Covid-19 pandemic, and the loss of economic activity due to the consequent national lockdown, could exacerbate the stress on bank balance sheets in the ongoing financial year.

According to the rating agency’s estimates, Rs 5.5 lakh crore worth of slippages could show up for banks in 2020-21, at least 40 percent of which will come from non-corporate loan exposures.

“With a significant drop in economic activity, India Ratings expects most sectors in India to experience varying degrees of revenue contraction during FY21, due to demand and supply disruptions,” the rating agency said in a statement on Thursday. “This presents fresh challenges for banks which over the last four years have been reeling under corporate stress.”

Jindal Haria, director at India Ratings & Research, said banks are unlikely to register any major recoveries this year, suggesting that outstanding gross bad loans for listed banks could increase from around Rs 9 lakh crore to over Rs 14 lakh crore on the upper side.

“If banks start lending freely again, we could see a 30-40 percent drop in additional slippages during the year,” Haria told BloombergQuint.

According to the agency’s assessment, corporate loans exposures could add Rs 3.4 lakh crore worth bad loans to bank balance sheets this year. A bulk of the incremental stress will come from sectors such as power, infrastructure, construction, hospitality, iron and steel, telecom and realty, the rating agency said.

India Ratings estimates that corporate loan exposures, representing 3.2 percent of total bank credit, could be at high risk of turning into slippages.

The agency assessed the top 500 debt-heavy corporates (over 70 percent of corporate credit) spread across 35 sectors. As per India Ratings’ analysis, discretionary consumer segment is likely to have a deep ‘U’-shaped recovery beginning in Q1FY22 than other three segments ‘essential, steady state and acyclical sectors’, ‘non-discretionary consumer goods & critical infrastructure’ and ‘industrial goods & services and cyclical sectors’ which are likely to recover at some points in FY21.
India Ratings & Research’s statement dated May 21

The rating agency also estimates that the fall in economic activity will intensify asset quality problems in the non-corporate lending segment, which had started showing stress before the pandemic. Segments such as retail, agriculture and micro, small and medium enterprises could add up to 40 percent of incremental slippages this year.

Speaking about recent economic measures announced by the government, such as Rs 3 lakh crore worth unsecured loans to the MSME segment with a 12-month moratorium, the rating agency said the stress could be reduced for borrowers if the measures are implemented in a timely manner.

India Ratings expects that the Covid-19 situation will significantly aggravate the stress in retail portfolio, specifically the unsecured portfolio; in the last five years, delinquencies have increased by 50 percent in this segment.

“The impact could be higher especially for private banks whose unsecured retail portfolio accounts for 16.6 percent of the total bank credit as against 6.3 percent for public sector banks,” the rating agency said.

India Ratings estimates that the higher slippages will warrant additional provisions for the banking system, most of which will come from public sector lenders.

Even under benign provisioning conditions, where the Reserve Bank of India’s (RBI) accelerated provisioning requirement under the June 2019 circular does not kick in, the credit costs for the system thus could increase up to Rs 2.7 lakh crore in FY21. About 70 percent of the additional provisioning will come from public sector banks.

“If the accelerated provisioning regime is reinstated, then there could be additional credit costs of 0.3-0.6 percent,” the rating agency said.

The additional provisions will also result in the need for capital infusion for public sector lenders. According to India Ratings’ estimates, government owned banks will need capital infusion of Rs 30,000-55,000 crore this financial year. The capital infusion estimate also factors in the volatile markets for additional tier 1 bonds and hence limited traction in the same.

If the accelerated provisioning regime is reinstated, then the capital requirement could further increase up to Rs 40,000 crore to maintain Tier 1 capital of 10 percent, which is 50 basis points higher than regulatory requirement that comes into action post September 2020, the rating agency said.

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