Covid second wave: Lenders may sacrifice growth over asset quality concerns, says ICRA

Risk aversion among lenders may restrict their FY22 credit growth, which is estimated at 7.3-8.3 per cent for banks and 7.0-9.0 per cent for non-banks, according to credit rating agency ICRA.

The likely impact of the second wave of Covid-19 pandemic is that lenders may sacrifice growth over asset quality concerns, said Karthik Srinivasan, Group Head – Financial Sector ratings, in a presentation. This would reduce growth-led capital consumption

The credit rating agency estimated FY21 credit growth for banks and non-banks at around 5.5 per cent and about 3-4 per cent, respectively.

Srinivasan assessed that asset quality pressure for lenders will rise and profitability normalisation could stretch beyond FY22 due to possible impact on fee incomes, lower credit growth and likely surge in credit provisions.

As per the presentation, the second wave will have an impact economic activities, which, in turn, will affect the self-employed segment more than the salaried segment. So, asset quality of lenders having higher presence of self-employed segments will be more vulnerable.

ICRA expects bank credit growth to be driven by growth in retail segment, with share of 55-60 per cent in incremental credit.

In the case of non-banks, retail exposures, including housing credit, is estimated to grow (about 8-10 per cent); wholesale exposures is estimated to decline (by up to 5 per cent) even on the back of a 10 per cent (estimated) contraction in the last two fiscals.

Fresh stress

Referring to the impact of the first wave, whereby higher delinquencies/ slippages were witnessed in products segments such as credit cards (8-10 per cent of loans), micro finance loans (5-8 per cent) and personal loans, said Srinivasan, while lenders have curtailed growth and tightened the underwriting in these segments, however, fresh stress could emerge from them.

The agency underscored that moratorium on debt servicing for six months (March-August 2020) and ECLGS (Emergency Credit Line Guarantee Scheme) would have enabled borrowers to accumulate some liquidity. However, disruption of income now can pressurize asset quality again.

ICRA expects delinquencies / overdue in special mention account/SMA 1 (31–60-days overdue) and SMA 2 (61-90-days overdue) to rise in the near term as the economic activities are likely to remain subdued in coming months.

Srinivasan said resolution / recoveries could get delayed with possible increase in losses.

ICRA assessed that the status-quo on non-performing asset (NPA) classification impacted the lenders’ ability to enforce recovery actions during H2 (October-March) FY21.

“Lockdown restrictions could impact the recoveries despite vacation of stay order on NPA classification by the Supreme Court. Proceedings under Insolvency and Bankruptcy code could also slow down,” per the presentation.

ICRA said clamour for moratorium/ re-introduction of restructuring could rise.

Srinivasan observed that though it is initial days, the severity of fresh lockdowns have been increasing, which could pose hardship for borrowers.

“If the economic activity remains disrupted for longer period, demand for moratorium / restructuring of loans are likely to intensify,” he added.

With prior experience of these events, ICRA expects regulators / lenders to be more proactive and pragmatic in policy making

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