The gross non-performing asset (NPA) ratio — bad loans as a percentage of total loans — of the banking industry is likely to reach 5.1-5.7% by March 2016 from 4.5% in Q3FY15, rating agency Icra said on Thursday.
It added that this will be the result of the withdrawal of regulatory forbearance on restructured assets from April this year. The forbearance on restructured advances ensured that banks classify those assets as standard and provide 5% instead of 15% required for NPAs.
However, the Reserve Bank of India (RBI) has indicated that it is not in favour of extending the deadline.
In its financial stability report (FSR) published December last year, the central bank had pointed out that while it may be legitimate to have regulatory forbearance during major crises, forbearance for extended periods and as a cover to compensate for lenders/borrowers’ inadequacies engenders moral hazard.
Vibha Batra, senior vice-president and group head (financial sector ratings) Icra, said flows to restructured advances were relatively high in Q3FY15 and may increase further in Q4FY15, it being the last quarter for restructuring with regulatory forbearance benefit.
She added that going forward, the RBI’s norm for flexible structuring of existing long-term project loans to infrastructure and core industries, the expected improvement in economic activity, and some moderation in interest rates are likely to reduce slippages.
Batra said while recoveries and upgrades dropped considerably in Q3FY15, the NPA generation rate was largely unchanged at 3.3% for public sector banks.
“PSBs’ fresh NPA generation was impacted by higher slippages from restructured accounts (around 25% of new NPAs generated during Q3, FY2015),” she said, adding that even though the pace of referrals to the CDR cell has moderated over the last few quarters, restructuring outside the CDR Cell remains high.
In December, RBI had allowed banks to refinance existing infrastructure projects under the 5/25 model, provided the projects have commenced commercial operations. In the 5/25 model, banks can extend loans to infrastructure projects for up to 25 years with the option of refinancing it every five years by the existing bank or a fresh lender.