Money & Banking

ICRA expects stressed assets of banks, NBFCs to jump in FY21

Our Bureau Mumbai | Updated on April 02, 2020 Published on April 02, 2020

Debt servicing ability of borrowers likely to be hit due to Covid-driven slowdown in economic activity, says rating agency

 

Stressed assets of banks and non-banking financial companies (NBFCs) could spike in FY21, despite the three-month moratorium provided by the Reserve Bank of India to borrowers on their loan repayments, warned credit rating agency ICRA. It reasoned that with the fall in economic activity, debt servicing ability of borrowers could be impacted.

Underscoring that Covid-19 and its aftermath will affect many businesses, the agency said the SME (small and medium enterprise) and retail segments will be more affected than the corporate segment.

Resumption of timely repayments after moratorium, which only provides near-term respite, remains suspect, especially for the unorganised segments with limited alternative funding avenues, it added.

In particular, ICRA observed that entities with higher share of asset classes such as microfinance, commercial vehicles and MSMEs (micro, small and medium enterprises) will be more vulnerable on core operating profitability as well as credit provisioning and will see a bigger negative impact on RoA (return on assets).

However, entities with exposure towards asset classes like gold loan, salaried housing, etc., will be the lesser impacted on these counts.

Credit profile

Karthik

Srinivasan, Group Head – Financial Sector Ratings, ICRA, says: “The slowing economy will hit borrower credit profile; with effects likely to be felt even after the moratorium. Build-up of stressed assets will exert pressure on capital levels; stressed assets in relation to the core equity would increase steeply.” Regulatory capital levels are likely to remain adequate as growth would slow down considerably.

In the case of banks, the agency expects NPA (non-performing asset) generation to increase when compared to earlier expectations of moderation. Further, credit costs will remain elevated and recoveries will get pushed back.

In the case of NBFCs, ICRA sees NPAs to increase by 50-100 per cent from the current levels over the next few quarters, depending on the asset class. However, credit losses may be lower. Credit cost may witness a higher increase because of Ind AS (accounting standard) requirements.

Weak business and operating environment (GDP, unemployment, inflation) and higher provisioning requirement for stage 1 and 2 assets could push-up overall credit cost/provisioning, it added.

Srinivasan said: “We expect the asset quality stress to reflect with a lag of 1-2 quarters post the removal of the moratorium and the stress will vary across segments. The ability of the borrowers to improve the roll-backs from the overdue buckets across segments will be a key monitorable.”

Credit growth to slow

Though the RBI has deferred the scheduled increase in regulatory capital requirements of banks by six months, ICRA said no budgeted capital for public sector banks (PSBs) for FY21 will limit the credit growth for banks to around 6 per cent and NBFCs to 6-8 per cent as their dependence on banks will increase in the near term.

With low credit growth, the likely rise in credit costs and drag of excess liquidity, the agency expects the profitability (RoA) of financial sector entities to be adversely affected by 50-90 basis points during FY21.

Published on April 02, 2020

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