Asset quality pressures are likely to resurface, cautions ICRA
ICRA Ratings has said that despite a decline in the reported Gross NPA and Net NPA by banks as on 31 December 2020 as compared to 31 March 2020, the asset quality for banks continue to remain monitorable.
Even including pro forma GNPAs of Rs.1.3 trillion (1.1% of gross advances) and NNPAs of Rs.1.0 trillion (1.0% of Net advances), the GNPA and NNPA of the banks stood at 8.3% and 2.7% as on 31 December 2020 as compared to 8.6% and 3.0%, respectively, as on 31 March 2020.
However, this decline was driven by loan write-offs of Rs.1.1 trillion (1% of advances) during 9MFY2021. Further, based on the restructuring guidance given by various banks, the overall volume of restructured advances is estimated at 1.3-1.5% of the advances, much lower than our initial estimates.
Commenting on these developments, Anil Gupta, Sector Head – Financial Sector Ratings, ICRA Ratings, says, “While the headline asset quality and restructuring numbers are encouraging, these don’t reflect the underlying stress on asset quality of banks. The level of loans in overdue categories has increased after upliftment of moratorium and the impact on asset quality will be spread over FY2021 and FY2022 as various interventions and relief measures have prevented a large one-time hit on profitability and capital of banks.”
Despite the impact of Covid-19 pandemic on debt servicing ability of borrowers, the Gross fresh slippages for banks stood much lower at Rs.1.8 trillion (2.7% of advances on annualised basis) during 9MFY2021 as compared to Rs.3.6 trillion (4.1%) during FY2020. This has been driven by various relief measures such as moratorium on loan repayment, standstill on asset classification and liquidity extended to borrowers under Guaranteed emergency credit line (GECL).
As the impact of these interventions wanes off, the asset quality pressures are likely to resurface, cautions ICRA, expecting the GNPAs (excluding write-offs) to rise to 9.6-9.7% by 31 March 2021 and 9.9-10.2% by 31 March 2022 from 8.6% as on 31 March 2020.
Notwithstanding the rise in headline GNPA numbers, the NNPA position of the banks is expected to be relatively lower because of significant provisions made by banks on their legacy NPAs.
As mentioned earlier, even on pro forma basis, the NNPAs were lower as on 31 December 2020 as compared to 31 March 2020. While the NNPAs are expected to rise marginally to 3.0-3.1% by 31 March 2021 (2.7% as on 31 December 2020 and 3.0% as on 31 March 2020), ICRA expects these to decline to 2.3-2.5% by 31 March 2022.
With decline in NNPAs and improved capital position driven by fresh capital raise during FY2021 as well as internal accruals that were buffered by sharp decline in bond yields, the solvency position for the banks stands relatively better providing some comfort to their loss absorption abilities.
The public banks raised Rs.120 billion (0.2% of risk weighted assets – RWAs) and private banks raised Rs.536 billion (1.3% of RWAs) of equity capital from market sources during FY2021.
In addition, the Government of India also infused Rs.200 billion (0.3% of RWA) into the public banks as part of its budgeted recapitalization for FY2021.
With the said capital raise, the Tier I capital position of public banks improved to 10.99% as on 31 December 2020 from 9.7% as on 31 March 2020, while for private banks, it improved to 16.66% from 14.1% during the above mentioned period. This coupled with lower NNPAs, also resulted in an improvement in solvency profile for banks during this period.
The Additional Tier-I (AT-I) bond market for public banks revived in FY2021 with more public banks issuing AT-I bonds as compared to last year, however the recent change in valuation norms of these bonds could reduce the appetite of mutual funds for incremental investments in these bonds
“As against our estimates of Tier-I Rs.328-431 billion of capital requirements, which factor in Rs.233 billion of AT-I bonds, where call option is falling due in FY 2022, the Government has budgeted equity capital of Rs.200 billion for public banks for FY2022.
“In case the AT-I markets remain dislocated in near term, the Government may need to upsize the recapitalisation plan in public banks,” said Gupta. #banks #financial #investment #economy /fiinews.com
