Reduction in fresh accretions to NPAs, higher recoveries from existing stressed assets under IBC and pick-up in credit growth should help.
Reduction in fresh accretions to non-performing assets (NPAs), higher recoveries from existing stressed assets under the Insolvency and Bankruptcy Code and a pick-up in credit growth should help shrink banks’ gross NPAs by 350 basis points to 8% by March 2020, Crisil said in a report on Tuesday.
According to the agency, public sector banks, which account for over 80% of the NPAs in the system, alone could see gross NPAs climb down over 400 bps to approximately 10.6% by March 2020, from a peak of 14.6% in March 2018.
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According to Krishnan Sitaraman, senior director, Crisil Ratings, “In fiscal 2019, write-offs, coupled with recoveries under IBC in key large stressed assets, played a critical role in reduction of NPAs. Further, after a gap of six years, the pace of NPA reduction is estimated to have overtaken that of fresh slippages for the banking system in fiscal 2019. Private banks, which have had fewer asset quality issues, should also witness an improvement in portfolio performance.”
Gross NPAs within the banking system hit a peak of 11.5% in March 2018 and stood at 9.3% in March 2019.
As Crisil points out, banks have already recognised approximately `17 lakh crore in stressed loans as NPAs since financial year 2016, aided by the Reserve Bank of India’s (RBI) strict norms and asset quality reviews.
Meanwhile, accretion of fresh NPAs dropped to 3.7% in FY 2019 against 7.4% in FY18 and is expected to be lower at around 3.2% this fiscal year, even factoring in slippages from the stress witnessed in a few large corporate and financial sector entities.
Other factors that the agency’s estimates depend on include resolution of some large NPA accounts under the RBI’s NCLT-1 and NCLT-2 lists by the end of this FY and supportive trends in corporate credit quality at an aggregate level.
The agency’s credit ratio, i.e. number of upgrades to downgrades, rose to 1.81% in the second half of FY19 against 1.67% in FY18.
Even if this credit ratio moderates going ahead, steady domestic growth and benign interest rates should continue to support credit profiles in the corporate sector, the report said.
Meanwhile, delinquencies have inched up marginally in the retail segment, the agency noted. However, “the granular nature of these loans should ensure diversification and support against material deterioration going forward.”
Also, given the regulator’s stance on restructuring of loans to small and medium enterprises (SME) till the end of FY2020, overall NPA position of banks should continue to witness an improving trend, Crisil noted.
According to Vydianathan Ramaswamy, associate director, Crisil Ratings, “We believe the seasoning of retail loans and performance of SME loans post the restructuring period will shape the asset quality trends for the banking sector, especially PSBs, over the medium-to-long term.