Banks are likely to see a 90-bps decline in their gross non-performing assets (GNPAs) to 5% in the current fiscal and a further improvement to 4% by the end of March 2024, rating agency Crisil said on Wednesday.
The key indicator of banks’ asset quality is likely to improve, “riding on post-pandemic economic recovery and higher credit growth,” the agency said in a statement. The asset quality of the sector will also benefit from the proposed sale of NPAs to National Asset Reconstruction Company (NARCL), the agency said.
Crisil director Subha Sri Narayanan said, “We expect slippages to trend 50 bps lower at ~2.0% for fiscal 2024 versus 2.5% last fiscal as the economy stabilises. This should support asset quality metrics even as the pace of write-offs, which contributed almost 60% to the reduction in gross NPAs in the past three fiscals, and large-ticket resolutions decelerate. Our base-case estimate factors in part-sale of legacy corporate loan NPAs to the NARCL, which should snip reported gross NPAs by ~50 bps.”
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A study of large exposures of banks, constituting more than half of corporate advances, showed the share of high-safety exposures increased to 77% as on March 2022 from 59% in March 2017, while those to sub-investment grade companies more than halved to 7% versus 17%, Crisil noted.
The asset quality improvement in the corporate segment follows a significant clean-up of bank books in recent years, and strengthened risk management and underwriting. “The steady improvement in corporate asset quality is clearly reflected in leading indicators such as the credit quality of bank exposures,” said Krishnan Sitaraman, senior direct and deputy chief ratings officer at Crisil Ratings.
The retail segment stayed resilient and gross NPAs are expected to remain range bound at 1.8-2.0% over the medium term, the agency said. “While the impact of increase in interest rates and inflationary pressure on individual borrowers’ cash flows will need to be monitored, almost half of the retail loans are home loans, where borrowers have relatively better credit profiles,” Crisil said, adding that “over the medium term, to avoid a repeat of past asset-quality challenges, it is important that banks don’t relax their credit underwriting standards while focusing on faster growth.”
Loans of Indian banks jumped 15.5% in the two weeks to August 26 from a year earlier, while deposits rose 9.5%, the latest Reserve Bank of India data showed.