Bank gross NPAs to rise to 8-9%, stressed assets to touch 10-11% : CRISIL

Bank gross NPAs to rise to 8-9%, stressed assets to touch 10-11% : CRISIL
Representation purpose only

Banks' gross non-performing assets (NPAs) will increase to 8-9% this fiscal year, a significant decrease from the peak of 11.2% reported at the end of fiscal 2018. The Covid-19 relief measures, such as the dispensation for restructuring and the Emergency Credit Line Guarantee Scheme (ECLGS), will help to contain the increase.

With 2% of bank credit forecast to be restructured by the end of current fiscal year, stressed assets - defined as gross non-performing assets and loan book under restructuring - should reach 10%-11%.

According to Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer at CRISIL Ratings, "the retail and MSME segments, which account for 40% of bank lending, are projected to suffer increased NPA and stressed asset accretion this time around." By fiscal year's end, stressed assets in both segments are expected to reach 4-5% and 17-18%, respectively. Without write-offs, mainly in the unsecured section, the numbers would have trended considerably higher."

The retail industry, which had been largely stable for the previous decade, has been tarnished by the pandemic, with salaried and self-employed borrowers alike having severe income issues and increased medical expenses, particularly in the second wave. Thus, the Reserve Bank of India (RBI) announced debt restructuring for retail borrowers in a first-of-its-kind measure to assist them in weathering the storm. This comes on the heels of a six-month moratorium granted by lenders last fiscal year.

Despite the efforts, CRISIL Ratings anticipates that stressed assets in the retail sector will increase to 4-5% by the end of this fiscal year, up from 3% last fiscal year. While mortgages, the largest component, would be unaffected, unsecured loans are projected to face the brunt of the pandemic.

However, the corporate sector is anticipated to be significantly more resilient. A significant portion of the corporate portfolio's stress had previously been identified during the five-year-old asset quality study. This, combined with the secular trend toward deleveraging, has strengthened corporate balance sheets, enabling them to weather the pandemic relatively unscathed in comparison to retail and MSME borrowers. This is demonstrated by the segment's 1% reorganisation. As a result, corporate stressed assets are likely to remain within the 9-10 percent range this fiscal year.

Rural areas, which were particularly heavily struck during the pandemic's second wave, have also made a good recovery. As a result, it is projected that stressed assets in the agriculture sector will stay relatively stable.

Subha Sri Narayanan, Director at CRISIL Ratings, explains, "While the restructured portfolio's performance will undoubtedly require regular monitoring, slippages from the restructured book are projected to be smaller this time." Historically, restructuring has been focused on larger exposures and has generally included maturity extension without meaningful haircuts, resulting in high subsequent slippages. This time around, the entry requirements for restructuring are more onerous. Additionally, recent trends indicate that a sizable proportion of debtors, mainly on the retail side, have begun increasing payments as their cash flows improve, despite having benefited from restructuring. MSMEs, on the other hand, may take longer to stabilise, and we will continue to monitor them."

CRISIL Ratings' predictions are based on a 9.5 percent GDP growth rate this fiscal year and ongoing improvement in corporate credit quality. A vicious third wave and a severe slowdown in demand growth might significantly erode these forecasts. On the other hand, the operationalization of the National Asset Reconstruction Company Ltd by the end of this fiscal year and the anticipated first-round sale of Rs 90,000 crore in non-performing assets may result in lower reported gross non-performing assets.