India Ratings and Research (Ind-Ra) has revised its outlook on the banking sector to “negative” for the second half of FY21 from “stable”. It warned that the sector’s credit costs could double.

The credit rating agency attributed its action to an expected spike in stressed assets, higher credit costs, weaker earnings on account of interest reversals and lower fee income, and muted growth prospects in the wake of the measures taken to contain the spread of Covid-19.

Additionally, capital buffers for most public sector banks (PSBs) remain modest, it added. As per Ind-Ra’s base case, the spike in stressed assets due to the pandemic is expected to double the credit costs for the banking system than the estimated pre-Covid levels for FY21.

The agency estimated the credit costs to be in the range of 2.6-3.4 per cent in FY21 (2.9-3.8 per cent for PSBs and 2-2.6 per cent for private banks), depending on the quantum of pool getting restructured or slipping to non-performing assets (NPAs).

Public sector banks

The agency revised the rating outlook on PSBs to negative for 2HFY21 from stable. It warned that PSBs’ modest capital buffers are expected to deplete further in FY21, due to provisioning requirements.

Also, pre-Covid profitability expectations for FY21 would be belied and most banks are likely to report net losses, Ind-Ra added. The agency observed that these banks may also need to continue building up their provision cover in FY22 for restructured assets as some of the restructured assets could turn NPA in FY23.

As per Ind-Ra’s assessment, PSBs would require ₹35,000-55,000 crore in 2HFY21 for building a Tier 1 ratio of 10 per cent. Their Covid/contingent provisions are much lower than that for private banks, it said.

Private banks

Ind-Ra maintained a stable outlook for private banks, as they are better placed to withstand the challenges presented by the pandemic. The agency noted that most large private sector banks have strengthened their capital buffers, built contingent provisions and have been proactive in managing the loan portfolio.

While the system’s credit growth could remain anaemic, and short-term financial performance could deteriorate modestly, Ind-Ra said large banks may benefit from credit migration.

The agency felt that as opportunities arise, these banks are in a position to gain substantial franchise growth in the medium term, given that they have also added to their capital buffers over the past few months.


Ind-Ra pegged the restructuring/slippages quantum from the corporate sector in FY21 to be in the range of 3-5.8 per cent of the banking credit amounting to ₹3.3-6.3 lakh crore. Even stressed assets that may not slip in the near term could be restructured as Covid-19 would have aggravated stress, it added.

As per the agency’s estimates, agri (excluding farm credit) and micro, small and medium enterprises (about 25 per cent of advances in private banks and 32 per cent in PSBs) would contribute about 85 per cent of the ₹2.1 lakh crore (1.9 per cent of banking system credit) non-corporate restructuring, with retail accounting for the rest in the restructuring pool.