Covid-19 Impact: Bad Loans May Rise To A Near Two-Decade High, Says S&P
Bad loans across the Indian banking system could rise to nearly 13-14% of total loans in the current financial year amid a rare contraction in Indian economy, showed data released by S&P Global Ratings. The agency expects India’s real GDP to contract by 5% this year.
At S&P’s projected level of non performing assets, the Indian banking system’s bad loan ratio would be close to the peaks seen during the 1998-2000 period. According to RBI data, the gross NPA ratio across Indian banks had hit a high of 14.7% in 1999.
S&P in its report on Tuesday said that the gross NPA ratio will rise to 13-14% by March 31, 2021 compared to an estimated 8.5% in the previous fiscal year. “Moreover, the resolution of these bad-debt situations will likely unfold slowly, which means banks may also be saddled with a huge stock of bad loans next year. We assume only about a 100 basis point improvement in nonperforming loans in fiscal 2022,” it added,
According to S&P, the Indian banking system was slowly coming out of the bad loan crisis over the last 18 months, with resolution of large bad loans, higher write-offs and slower addition of fresh slippages. But a “formidable overhang” of non performing assets remained when the Covid crisis struck. “This largely derailed that rehabilitation process,” the rating agency said.
Last week, BloombergQuint reported that the RBI had begun ground work on a one-time restructuring plan. Should that be permitted, it may reduce the level of slippage this fiscal, S&P said. “However, in our view, restructuring may not resolve the problem. It may just defer NPL recognition, as it did a few years ago.”
Other Highlights Of The Report
- Credit costs to rise to 3.7% of total loans in FY21, pushing up provisions and increasing losses for the banking sector. This cost should drop to 2% in fiscal year 2022, but this would still be above the 15-year average of 1.5%.
- The increase in credit costs in fiscal 2021 owing to the Covid-19 outbreak will likely more than offset trading gains garnered from falling interest rates, lower negative drag on earnings due to a reduction in the cash reserve ratio requirement, and a lower tax rate.
- System-wide credit growth to continue remain in low single digits in FY21 as banks turn risk averse. Public sector banks could see 4-5% credit growth this fiscal.
- Public sector banks may need Rs 35,000-40,000 crore worth capital infusion this year to fund growth but will be able to meet regulatory capital requirements on their own.
- Private-sector banks rated by S&P are well capitalised and should be able to absorb the increase in provisioning. Moreover, these banks have more capacity to raise external capital than public-sector banks, if required.