Gross non-performing assets (GNPAs) of banks is expected to improve 90 basis points (bps) to about 5 per cent this fiscal, and another 100 bps to a decadal low of about 4 per cent by March 31, 2024, riding on post-pandemic economic recovery and higher credit growth, according to CRISIL ratings.

CRISIL observed that the asset quality of the banking sector will also benefit from the proposed sale of NPAs to the National Asset Reconstruction Company (NARCL).

“That said, not all segments will perform equally well. The biggest improvement will be in the corporate segment, where gross NPAs is seen falling below 2 per cent next fiscal from a peak of about 16 per cent as on March 31, 2018,” the agency said in a statement.

Corporate asset quality

Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings, noted that the steady improvement in corporate asset quality is reflected in the credit quality of bank exposures.

A CRISIL Ratings study of large exposures of banks, constituting more than half of corporate advances, shows the share of high-safety exposures (includes AAA/AA category and exposure to public sector undertakings) has increased to 77 per cent as on March 2022. However, exposure to sub-investment grade companies more than halved to 7 per cent versus 17 per cent.

“This asset quality improvement in the corporate segment follows a significant clean-up of bank books in recent years, and strengthened risk management and underwriting. This has also led to increased preference for borrowers with better credit profiles,” Sitaraman said.

More upgrades

The deleveraging and strengthening of India Inc balance sheets also helped. This is reflected in the CRISIL Ratings credit ratio (upgrades to downgrades), which touched 5.04 in the second half of FY22. The trend of upgrades comfortably outnumbering downgrades should continue over the medium term, per the agency.

CRISIL Ratings underscored that with much of the stress in the corporate loan book already recognised and better quality of incremental lending, restructuring for this segment was low at about 1 per cent, covering only a few corporate groups.

Mechanisms, such as the Insolvency and Bankruptcy Code, have also supported recoveries and increased credit discipline among borrowers.

MSMEs: A fourth of these a/cs could slip

The agency assessed that Gross NPA in the MSME (micro, small, and medium enterprises) segment, which suffered the most during the pandemic, may rise to about 10-11 per cent by March 2024 from about 9.3 per cent as on March 31, 2022.

“While relief measures did help contain asset quality deterioration last fiscal, the segment saw the most restructuring at about 6 per cent compared with about 2 per cent for the overall banking sector. About a fourth of these accounts could potentially slip into NPAs,” the agency said.

Retail segment resilient

CRISIL Ratings said the retail segment remains resilient and gross NPAs are expected to remain rangebound at 1.8-2.0  per cent over the medium term.

While the impact of increase in interest rates and inflationary pressure on individual borrowers’ cash flows will need to be monitored, almost half of the retail loans are home loans, where borrowers have relatively better credit profiles, it added.

While segments, such as unsecured loans, may see some pressure, overall retail asset quality is expected to stay within expected bounds, noted the agency.

Agriculture segment gross NPAs is seen flat at 9-10 per cent following another year of reasonably normal monsoon and harvest, per CRISIL Ratings’ assessement.

Subha Sri Narayanan, Director, CRISIL Ratings, said: “We expect slippages to trend 50 bps lower at about 2.0 per cent for FY24 versus 2.5 per cent last fiscal as the economy stabilises. This should support asset quality metrics even as the pace of write-offs, which contributed almost 60 per cent to the reduction in gross NPAs in the past three fiscals, and large-ticket resolutions decelerate.”

CRISIL Ratings’ base-case estimate factors in part-sale of legacy corporate loan NPAs to the NARCL, which should snip reported gross NPAs by about 50 bps, she said. Over the medium term, to avoid a repeat of past asset-quality challenges, the agency opined that it is important that banks don’t relax their credit underwriting standards while focussing on faster growth.

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