Banks’ asset quality ratios may worsen up to 600 bps: Fitch

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Published: May 29, 2020 6:30 AM

The report added that while secured loans such as home and auto are relatively more resilient, they will not be isolated from stress as unemployment rises.

The impaired loan ratio will trend up due to both higher fresh slippages and lower loan growth.The impaired loan ratio will trend up due to both higher fresh slippages and lower loan growth.

Asset quality of Indian banks may be severely hit over the next two years as a result of the Covid crisis and their impairment ratios could rise by 200-600 basis points (bps), depending on the severity of stress and banks’ individual risk exposures, rating agency Fitch said on Thursday.

The impaired loan ratio will trend up due to both higher fresh slippages and lower loan growth. The impact will be spread over the course of FY21 and FY22 as the impact of fresh slippages will only be reflected meaningfully after regulatory forbearance ends in August 2020. “Signs of impending pressures were evident in the early Q4FY20 results from private banks, which will increase from H1FY21 despite the relief measures announced by the authorities,” Fitch said.

The slowdown will pressure asset quality across sectors and segments. Private banks have either better asset quality and/or loan-loss cover than state-run banks, but remain exposed due to their large retail books, notably in unsecured personal loans and credit cards which run a high risk of impairment. The report added that while secured loans such as home and auto are relatively more resilient, they will not be isolated from stress as unemployment rises.

Public sector banks (PSBs) are also at risk due to aggressive growth in retail, while they also have higher small and medium enterprises (SME) exposures. “They are, therefore, more exposed to risks from this segment as SMEs have very little tolerance to such large-scale cash flow disruption. We also expect a significant rise in delinquencies from stressed corporate sectors,” the report said.

Fitch expects financial profiles to weaken across all banks, and PSBs are most at risk. Stressed corporate sectors such as tourism, real estate, auto, infrastructure and non-banking financial companies (NBFCs) are vulnerable, but granular loan categories such as small enterprises and retail are also high-risk. “With slippages rising across sectors, Fitch believes that the banks’ average loan-loss cover of around 65% will be inadequate, resulting in banks incurring significant loan-impairment charges amid falling growth and income levels,” the report said.

PSBs are under pressure from the authorities to lend more to the affected sectors, but their ability to do so is limited without significant recapitalisation from the state. They face a high risk of capital erosion, yet their ability to access capital markets is affected due to a sharp discount on their equity valuations, analysts at Fitch wrote, adding that the situation can be particularly challenging for banks like Punjab National Bank (PNB) and Canara Bank, which have to negotiate through this crisis while managing their recent mergers.

Private banks have stronger loss-absorption buffers than PSBs. Their higher capitalisation may still also prove to be vulnerable under severe stress, although the risk of regulatory breach is low, the report said.

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