The banking sector’s non-performing assets (NPAs) will shoot up to 10-11% of gross loans as on March 31, 2022, from 8% on June 30, 2020, ratings firm S&P Global said in a report on Tuesday. The firm further said that collection rates, which improved sharply in the second quarter to an average 95%, may not be sustainable. “S&P Global Ratings believes forbearance is masking problem assets arising from Covid-19. With loan repayment moratoriums having ended on August 31, 2020, we expect to see a jump in NPLs for the full year ending next March,” the report said.
While financial institutions (FIs) performed better than expected in the second quarter, much of it was due to the six-month loan moratorium, as well as the Supreme Court ruling barring banks from classifying any borrower as an NPA, the agency said. Bank NPAs would have generally been higher by 10-60 basis points (bps) in the absence of the court ruling. For some finance companies, this differential was even greater. “For example for Shriram Transport Finance, the proportion of NPLs was 84 bps lower than we’d expect under normal reporting practices,” S&P said.
Collection rates have picked up in Q2, aided by a pickup in economic activity since the lockdowns ended and, in many cases, by the financial savings of the borrowers. “Given that overall economic activity levels remain soft, savings could deplete fast, potentially hurting future collections,” S&P said. Some of the good news in the first half may endure and for this reason, the agency has lowered its estimated bank NPA ratio to 10-11% of gross loans over the next 12-18 months, from earlier estimates of 13-14%. Nonetheless, it still anticipates that the sector’s financial strength will not materially recover until FY23.
S&P believes that about 15% of bank loans are weak. Banks’ credit costs, as measured by annualised loan loss provisions as a percentage of gross loans, will remain elevated at 2.2-2.9%. It expects 3-8% of loans to get restructured. The Reserve Bank of India’s (RBI) scheme for a one-time restructuring of debt will reduce slippage in the current fiscal year, but it may delay recognition to the next year or so. The demand for restructuring so far has been lukewarm, but more requests may flow in December. “At this juncture, we believe the system restructuring could be at lower end of our estimates,” the report said.