Covid-19 third wave may dent banks’ recovering asset quality, say analysts

The threat of a third wave poses high risk to the performance of the restructured loan book and remains a key monitorable for near term

“We believe full lockdown could derail the growth/asset quality normalisation story, both for banks and NBFCs.
“We believe full lockdown could derail the growth/asset quality normalisation story, both for banks and NBFCs.

By Piyush Shukla

The recovering asset quality of banks may get impacted if the Omicron variant of Covid-19 causes a third wave of infections, triggering localised lockdowns, analysts said. Banks could see an impairment in advances to self-employed segment, microfinance, unsecured consumer retail, commercial vehicle, and small and medium enterprises (SME), according to analysts. According to domestic rating agency ICRA, total standard restructured loans of banks are estimated at 2.9% of standard advances, and these largely include borrowers that were impacted by the first and second waves of the pandemic.

The threat of a third wave poses high risk to the performance of the restructured loan book and remains a key monitorable for near term.“The third wave could again have a similar impact on the asset quality of lenders with borrowers in self-employed segments getting relatively more impacted. However, this will depend on the severity of mobility restrictions put across by various states.

Further, restructured loans of lenders, a sizable portion of which is accounted for by borrowers impacted under first and second wave of Covid, will remain highly vulnerable as the end of the moratorium period offered as part of restructuring could coincide with third wave of Covid. This could impact the servicing of the restructured loans amid the third wave,” Anil Gupta, vice president of financial sector ratings at ICRA, told FE.Banks’ asset quality improved in the quarter ended September, with the gross non-performing asset (GNPA) ratio decreasing to 6.9% and net NPA at 2.3%, according to Reserve Bank of India’s (RBI) December Financial Stability Report (FSR).

As per the stress test conducted by the central bank, banks’ gross non-performing asset ratio may rise to 8.1% by September 2022 under the baseline scenario and to 9.5% under severe stress if the economy is hit by an Omicron wave.Within bank groups, GNPAs of PSBs  may deteriorate to 10.5% by September 2022, from 8.8% in September 2021, under the baseline scenario. For private banks, the gross bad loan ratio may rise to 5.2% from 4.6%.

Brokerage Emkay Global Financial Services said banks are well-placed to withstand the asset quality impact of mild or partial lockdowns, if any, due to the fresh Covid wave. However, a severe wave similar to second wave could pose a meaningful risk to otherwise fragile growth and asset quality. SME loans and micro finance segments remain the most vulnerable, and thus banks with relatively higher exposure to these segments, including PSBs, Bandhan Bank, Ujjivan SFB, Axis Bank, IndusInd Bank, RBL Bank, City Union Bank and DCB Bank, could be at relatively higher asset quality risk, the brokerage said.“We believe full lockdown could derail the growth/asset quality normalisation story, both for banks and NBFCs.

NBFCs are anyways facing asset quality headwinds given recent RBI norms and fresh Covid wave could add to the woes. We believe unsecured consumer retail, commercial vehicle, microfinance and SME could be hit the most in case of a fresh wave,” said Anand Dama, BFSI head, Emkay Global Financial Services. 

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