The third quarter results of banks and non-banking financial companies (NBFCs) are indicating a rising stress in their balance-sheets, but analysts say the pain is far lower than anticipated.

Over the past month, almost all private sector banks, housing finance companies and NBFCs as well as a few public sector lenders have reported performances for the quarter ended December 31, 2020 with higher pro forma gross non-performing assets compared to the reported gross NPAs.

Pro forma NPA includes non-performing assets created in 2020 when the RBI allowed banks to standstill recognition of fresh stressed assets. Back-of-the-envelope calculation reveals that Covid-led restructuring of loans amounted to at least ₹60,000 crore as on December 31, 2020.

State Bank of India, in its Q3 results on Thursday, reported gross NPAs at 4.77 per cent of gross advances. “But for the Supreme Court interim order, the gross and net NPAs would have been at 5.44 per cent and 1.81 per cent, respectively,” it said. Restructuring requests received till December 2020 amounted to ₹18,125 crore, it added.


Supreme Court order

The Supreme Court, in an order dated September 3, 2020, had said the accounts not declared non-performing till August 31, 2020, shall not be declared NPAs till further orders. The six-month loan moratorium ended on August 31.

October-December 2020 was the first quarter after the loan moratorium came to an end. However, banks have not reclassified NPAs yet as they are awaiting the Supreme Court order. The RBI had already flagged the problem in its January Financial Stability Report, which said that the gross NPA ratio of all scheduled commercial banks may increase from 7.5 per cent in September 2020 to 13.5 per cent by September 2021 under the baseline scenario and that it can escalate to 14.8 per cent under a severe stress scenario.

Bankers believe the NPA trends are in line with expectation and with collection efficiencies improving every month, some of the stress will go away. A report by India Ratings said only five of its rated 450 issuers in the mid and emerging corporates space had availed themselves of the RBI’s financial restructuring facility. This was made possible by various government measures, faster demand recovery in the domestic market, supported by a marginal pick-up in exports in certain sectors. Prakash Agarwal, Head-Financial Institutions, India Ratings and Research, said restructuring so far has been very muted at less than 1 per cent of net advances.


Healthy capital buffers

“Lower-than-expected additions to stressed assets while maintaining Covid-19 provisions — which are still unused — implies lower need of provisioning and consequently lower pressure on profitability, going ahead,” he said.

“We were earlier factoring in almost 1.5-2x jump in slippages,” says Mona Khetan, Vice-President, BFSI sector, Dolat Capital. However, annualised nine-month slippages for banks under Dolat’s coverage (including large private and public sector banks) declined by just 10-150 bps versus last fiscal.

“Large corporates have been reasonably resilient while retail stress was restricted to unsecured loans. The SME segment benefited from ECLGS disbursements,,” said Khetan.