Money & Banking

NBFC, HFC turmoil may lead to higher slippages, but NPAs to be under control

Our Bureau Mumbai | Updated on January 13, 2020 Published on January 13, 2020

Bandhan Bank, IndusInd Bank to announce quarterly results today

Despite big-ticket resolutions such as Essar Steel, muted loan growth and the turmoil in the NBFC and housing finance sector could lead to higher slippages in the third quarter of FY20, though bad loans will be remain under control.

“The profitability of banks should improve and provisioning coverage ratio will go up substantially. Most banks had already provided for the Essar Steel account and, now with the resolution, will either book some provisions or boost their profits,” said Sanjay Agarwal, Senior Director, CARE Ratings, adding that were some NBFC and HFC slippages in the last quarter.

The gross non-performing asset ratio will be about 9.2 per cent to 9.3 per cent in March-end against the earlier expectation of 9.8 per cent, he said.

Private sector banks, led by Bandhan Bank and IndusInd Bank, are set to announce their quarterly results on Tuesday, followed by larger lenders such as HDFC Bank on January 18 and ICICI Bank on January 25. Most public sector banks are expected to announce their results for the quarter October to December quarter next month.

“We expect banks under our coverage to report stable asset quality as there were no major corporate slippages reported during the quarter. However, credit costs are likely to remain elevated as recovery prospects remain weak (excluding the Essar resolution) and the risk of further slippages from SME book remains an overhang,” said ICICI Securities in a recent note.

“The banking sector is expected to witness continued weakness on the growth front in the third quarter this fiscal, with domestic growth at two per cent quarter-on-quarter and seven per cent year-on-year, according to the latest RBI data,” said Reliance Securities in a note, adding that it expects benefits on lower cost of funds and decline in share of bad loans to aid net interest income growth of 16 per cent year-on-year.

Asset quality

However, despite slippages due to the downgrading of some housing finance and NBFCs in the third quarter, the sector expects asset quality to benefit from strong corporate recoveries from Essar Steel, Prayagraj Power, Rattan India Power, and Ruchi Soya.

“The above four accounts, with an aggregate exposure of about ₹75,000 crore, is expected to result in recoveries of about ₹50,000 crore to ₹55,000 crore for banks,” it said.

“Pervasive moderation in system loan traction. Apart from sustained weak credit demand from old economy sectors, there was a marked slowdown in credit to NBFCs, housing, commercial real estate, retail and wholesale trade and professional and other service,” said YES Securities.

Loan growth was about 8.4 per cent at the end of December 2019 against 8.9 per cent at the end of September 2019. ICRA had said in a recent reportthat bank credit growth could decelerate to 6.5 per cent to 7 per cent during the current fiscal from about 13 per cent last fiscal due to limited incremental credit growth.

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Published on January 13, 2020
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