Money & Banking

Ind-Ra expects beginning of new NPA cycle in banking sector

Mumbai | Updated on May 21, 2020

The banking sector may see the beginning of a new non-performing asset (NPA) cycle, with the pandemic likely to drive banks’ total slippages of up to ₹5.5-lakh crore in FY21, cautioned credit rating agency India Ratings (Ind-Ra).

Of this total estimated incremental slippages of ₹5.5 lakh crore, corporate slippages are pegged at ₹3.4-lakh crore and the rest from non-corporate segments, according to a report prepared by the agency.

With a significant drop in the economic activity, Ind-Ra expects most sectors in India to experience varying degrees of revenue contraction during FY21 due to demand and supply disruptions.

This presents fresh challenges for banks, which over the last four years, have been reeling under corporate stress, it added.

Banks faced elevated provisions resulting from the corporate stress cycle over FY16 to FY20, and as per Ind-Ra’s estimates, they had largely provided for the existing corporate stress and were progressing towards a more moderated credit cost cycle.

“However, the Covid-19-related measures are likely to result in another cycle of stress.

“Additionally, the pressure on non-corporate segments, which was already visible pre-Covid-19, is likely to intensify,” cautioned the agency.

Ind-Ra has already revised its GDP estimates for India for FY21 to 1.9 per cent, lowest in 29 years (FY92: GDP grew 1.1 per cent). It observed that the lockdown has intensified the domestic macroeconomic concerns on GDP growth, employment growth and demand-supply.

Corporate stress

Based on Ind-Ra’s vulnerability framework and corporate stress analysis of 30,000 corporates, the total corporate standard-but-stressed corporate pool may increase from 3.8 per cent of the total bank credit as of December (pre-Covid-19 levels) 2019 to up to 6.6 per cent under the agency’s post Covid-19 corporate stress case.

As per Ind-Ra, the incremental stress is mainly from sectors, including power, infrastructure, construction, hospitality, iron & steel, telecom and realty. Out of this, the agency estimates corporates exposures of up to 3.2 per cent of total bank credit are at a high risk of slippage.

Ind-Ra’s analysis shows that the discretionary consumer segment is likely to have a deep U-shaped recovery, with recovery beginning in Q1 (April-June) FY22 than other three segments, ‘essential, steady state & acyclical sectors’, ‘non-discretionary consumer goods & critical infrastructure’, and ‘industrial goods & services and cyclical sectors’ that are likely to recover at some points in FY21.

Non-corporate segments

In Ind-Ra’s view, the GDP slowdown due to Covid-19 outbreak will aggravate the stress and slippages in the non-corporate segments – retail, agriculture and micro, small and medium enterprise (MSME) segments.

The agency expects about 40 per cent of the incremental slippages to come from the non-corporate segments.

Referring to the measures announced by the government as part of the economic (stimulus) package as mid- to long-term measures, Ind-Ra opined that if these are implemented in a timely manner, it could aid materially to reduce the expected stress in MSMEs.

Ind-Ra believes the Covid-19 situation will significantly aggravate the stress in retail portfolio, specifically the unsecured portfolio. In the last 5 years, the delinquencies have increased by 50 per cent.

The impact could be higher especially for private sector banks whose unsecured retail portfolio accounts for 16.6 per cent of the total bank credit against 6.3 per cent for public sector banks (PSBs).

Published on May 21, 2020

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