Banks will likely have trouble maintaining momentum after the proportion of non-performing loans (NPL) to total loans fell consistently so far this year.
Forbearance is masking problem assets for Indian banks arising from the pandemic.
The road ahead for the Indian banks is likely to be troublesome as the stressed assets may shoot up in the medium-term. Banks’ non-performing assets may rise to 11 per cent of gross loans in the next 12-18 months, from 8 per cent on June 30, 2020, S&P Global Ratings said. Forbearance is masking problem assets for Indian banks arising from the pandemic, and financial institutions will likely have trouble maintaining momentum after the proportion of non-performing loans (NPL) to total loans fell consistently so far this year, the report added.
Various other agencies expect banks to see a surge in profits as they will not have to spend a fortune on provisioning for stressed assets. But the S&P report titled “The Stress Fractures In Indian Financial Institutions” said that much of the improved performance in the financial institutions are due to the six-month loan moratorium, as well as a Supreme Court ruling barring banks from classifying any borrower as NPA. Hence, it underlined that the NPL estimates are lower than earlier but the sector’s financial strength will not materially recover until fiscal 2023. The report further said that 3-8 per cent of loans could get restructured.
The S&P estimates are in line with the RBI’s previous expectations of skyrocketing NPAs. The Reserve Bank, in its FSR report, had said that in a “very severe stressed scenario”, the gross NPAs could rise to as high as 14.7 per cent of total loans by March 2021, and under the baseline scenario, the gross NPA ratio could rise to 12.5 per cent. Further, S&P, in its June 30 report, had estimated that bank gross NPAs could rise to as high as 13-14 per cent.
Meanwhile, recent reports by Kotak Institutional Equities and Credit Suisse estimated that banks and NBFCs may see a sudden rise in the net profits in upcoming quarters and that despite the uncertainty mounting over the macroeconomic outlook, those would witness a fall in provisions.