Bank NPAs to climb to 9.6-9.7% in FY22: ICRA
ICRA, in its latest report, said bad debts of Indian banks could rise significantly and sharply in the current fiscal year as authorities and the Reserve Bank of India roll back measures to regulatory and monetary assistance. It has been reported that banks could see gross bad loans rise to 9.6% – 9.7% in the current fiscal year ending March 2021 and 10.2% by fiscal 2022.
Although Indian banks reported a decrease in bad loans during the December quarter, the impact of pandemic-induced disruptions on asset quality will be spread over FY21 and FY22, leading to consequently bank NPAs to climb to 9.6-9.7%. in FY22.
Banks saw their gross and net non-performing assets (NPA) improve in the third quarter. Despite the inclusion of pro forma bad debt of around Rs 1.3 trillion, the gross NPA ratio stood at 8.3% in December from 8.6% as of March 31, 2020.
This decline was largely driven by mortgage cancellations of Rs 1.1 lakh crore throughout the 9 months of the 12 month fiscal year ending March 2021. This was also based on restructuring guidelines given by various banks, the overall volume of recast debt is estimated at 1.3-1.5% of advances, much lower than initial estimates.
Anil Gupta, Head of Financial Sector Ratings, ICRA said that “while the asset quality and restructuring figures are encouraging, they do not reflect the underlying stress on the quality of banks’ assets.”
He further added that “the level of loans in the overdue categories increased after the moratorium was raised and the impact on asset quality will be spread over fiscal years 2021 and 2022, as various interventions and relief measures have avoided a unique impact on the profitability and capital of banks. “
Despite the impression of the Covid-19 pandemic on the debt service capacity of debtors, recent gross slippages by banks amounted to Rs 1.8 lakh crore in December 2020, compared to Rs. 3.6 lakh crore at a similar time, 12 months ago.
As reported by the rating agency, this improvement in asset quality was motivated by various relief measures such as the moratorium granted on loan repayments, the status quo imposed on asset classification and the liquidity extended to borrowers under a secured emergency line of credit. However, the agency warned that as soon as the impact of these interventions wears off, pressures on asset quality are likely to resurface.
However, it should be noted that the banks’ net NPA position is expected to be relatively lower due to the large provisions made by banks on bad debts. Consequently, with the fall in net NPAs and the improvement in the capital position thanks to further capital increases in fiscal year 21 as well as internal adjustments amortized by a sharp drop in bond yields, the solvency position of banks is relatively better, offering some comfort to their loss absorbing capacities.
Gupta said that “compared to our estimates of Rs of Tier-I capital. 32,800-43100 crore of capital requirements, which take into account Rs 23,300 crore of AT-I bonds, where the call option expires in fiscal year 2022, the government has budgeted for equity of Rs. 20,000 crore for public banks ”. He added that “in the event that AT-I markets remain dislocated in the short term, the government may have to step up the plan to recapitalize public banks.”
There are reports that public sector banks have so far raised Rs 12,000 crore and personal banks have raised rupees. 53,600 crore of equity capital from market sources throughout the past fiscal year. In addition, the federal government has also injected rupees. 20,000 crore in general public banks as part of its budgeted recapitalization for the 12-month fiscal year 2021.