How much will banks’ NPAs rise once loan moratorium, restructuring end?

Banks have managed to keep their stressed assets and bad loans under control despite the economic fallout of the Covid-19 pandemic, but in the New Year, their non-performing assets could see a sharp rise.

The loan moratorium and restructuring initiatives until December 31 as well as the Supreme Court barring banks from declaring any borrower as non-performing could help them report improved NPA numbers even for the third quarter this fiscal.

A recent report by S&P Global Ratings has estimated that banks’ NPAs will rise to double digits, between 10-11 per cent of gross loans as on March 31, 2022 from 8 per cent on June 30, 2020.

It has forecast NPAs to rise to 10.1 per cent in fiscal 2021, and then dip to 9.9 per cent in fiscal 2022 before coming down to 8.9 per cent in fiscal 2023.

“We continue to believe that about 15 per cent of bank loans are weak,” S&P said in a report titled ‘The Stress Fractures in Indian Financial Institutions’.

“With loan repayment moratoriums having ended on August 31, 2020, we expect to see a jump in NPLs for the full year ending next March....For the banks, their NPLs would have generally been higher by 10- 60 basis points, in the absence of the court ruling,” it said.

However, with better than expected economic recovery, the agency has lowered its NPA ratio projection from the earlier 13-14 per cent to 10-11 per cent.

“Nonetheless, we still anticipate the sector’s financial strength will not materially recover until fiscal 2023 (ended March 31, 2023),” S&P Global Ratings said.

Under control

Until now, banks have remained watchful of stress emanating from the Covid-19-led crisis and have been making provisions every quarter since March 31, 2020, and have also been improving their capital buffers through fund-raises. Bad loans have remained well under control.

In fact, a recent analysis by CARE Ratings revealed that the ratio of NPAs to gross advances improved to 7.7 per cent in September compared with 8.2 per cent in June and 7.9 per cent in March.

“The moratorium provided till August had given space in terms of recognition of NPAs, which could have improved the ratios. Therefore, we may have to wait for these time periods to elapse to gauge the true levels of NPAs in the system,” said Madan Sabnavis, Chief Economist, CARE Ratings.

Bankers, in turn, point out that collection efficiencies have improved and repayments are also on the rise, while restructuring requests have been low. Most lenders have also become risk-averse and are choosy about lending.

“We have until December 31 and most banks have made adequate Covid-related provisions. A clearer picture will emerge after that,” noted a senior bank executive.

However, the S&P report warned that collection rates, which improved sharply in the second quarter to an average 95 per cent, may also wane. “This trend is aided by the pick-up in economic activity since lockdowns ended and, in many cases, by the financial savings of the borrowers,” it noted.

The agency expects about 3-8 per cent of loans to get restructured and ruled out any large-scale corporate restructuring given the robust recovery in corporate earnings.

“Banks’ credit costs, as measured by annualised loan loss provisions as a percentage of gross loans, will remain elevated at 2.2-2.9 per cent. India is no exception in this aspect; we expect the credit cost to be elevated this year and next for many other countries in the region,” it further said.

Some relief

A partial silver lining for banks could, however, be the long pending resolution of DHFL and Bhushan Power, which are expected to be completed in the coming months.

Significantly, liquidity is unlikely to be a problem, especially for strong banks.

The S&P report said it expects liquidity to remain strong for banks as the system continues to benefit from a “flight to safety.”

“Given limited credit demand and heightened risk aversion, banks have been parking excess liquidity in government securities. This surplus system liquidity is flowing through to top-tier non-bank financial companies (NBFCs), as indicated by a sharp reduction in risk premiums,” it said, however noting that weaker finance companies have faced higher risk premiums.

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