Challenges for normalization of businesses
The asset quality pressure for banks and non-banks (NBFCs) is expected to increase in FY2021, notwithstanding the three-month moratorium provided by the Reserve bank of India (RBI) to borrowers on their loan repayments, according to ICRA.
As per ICRA’s estimates, the GDP growth is expected to slow down to 2.0% during FY2021 (-4.5% during Q1FY2021) from estimates of 4.4% in FY2020.
On the back of a slowing GDP growth and curtailment of discretionary expenditures across the value chain, it is believed that borrowers will continue to face challenges for some time on normalization of business conditions across the asset classes once the lockdown is lifted.
“We expect the asset quality stress is likely to reflect with a lag of 1-2 quarters post the removal of the moratorium and the stress will vary across segments,” said Karthik Srinivasan, Group Head – Financial Sector Ratings, ICRA.
The ability of the borrowers to improve the roll backs from the overdue buckets across segments will be key monitorable.
In particular, entities with higher share of asset classes such as microfinance, commercial vehicles and MSMEs etc will be more vulnerable on the core operating profitability as well as the credit provisions and will see the greater adverse impact on ROA, while entities with exposure towards asset classes like gold loan, salaried housing etc will be the lesser impacted on these counts.
“Even in a scenario whereby the banks and non-banks are able to absorb such increase in credit provisions through their P&Ls and prevent the capital erosion, the level of stressed assets in relation to the core equity is expected to increase, thereby weakening their solvency profile,” added Mr. Srinivasan
With the recent cut in policy rates by RBI and small savings rates by Government of India (GoI), the banks are expected to cut their 1-year deposit rates by ~50-70 bps during FY2021 (apart from the 70 bps cut in 1-year deposit rates during FY2020).
The RBI’s announcement of Rs.1 trillion of funding for purchase of corporate debt instruments has softened the bond yields by more than 100 bps during last few days following the sell-off in capital markets and redemption witnessed by debt mutual funds in the recent past.
However certain private banks (PVBs) and non-banks will continue to face elevated funding costs amid higher risk aversion from the investors.
Some of the private banks witnessed 3-10% reduction in their deposit base since the imposition of moratorium on Yes Bank.
Accordingly, ICRA expects these institutions to maintain excess liquidity and curtail growth, which could result in compression in their interest spreads and profitability.
The cost of interest bearing funds for PVBs over PSBs has widened to ~53 bps during Q3FY2020 from 48 bps during Q3FY2019 and 25 bps during Q3FY2018; and this could increase further to 70-80 bps in coming quarters.
For the non-banks, high reliance on debt market borrowings may pose challenges as moratorium may not be available on their debt capital market borrowings.
Further, possible shrinkage of AUMs of debt mutual funds, may lead to a slowdown in issuances and rollover of commercial papers; and non-convertible debentures in the near term. However, ICRA continues to maintain that the ability to have diversified funding sources including access to debt capital markets will remain as key differentiator for non-banks.
“We expect non-banks will further increase their focus on funding from bank borrowings in the near-term, which may push up the credit growth of banks.
“Moreover, we continue to expect that the non-banks will continue to exercise caution on asset growth in the near term and the liability mobilization in the near-term will largely be towards refinancing their maturing obligations, adds Srinivasan.”
Amid funding challenges, higher on-balance sheet liquidity and uncertainty on asset quality, private lending institutions are likely to remain cautious on fresh disbursements, whereas the public sector banks (PSBs) may be constrained by their capital position and merger induced bottlenecks.
Though the RBI has deferred the scheduled increase in regulatory capital requirements of banks by six months, no budgeted capital for PSBs for FY2021 will limit the credit growth for banks to around 6.0% and NBFCs to 6-8% as their dependence on banks will increase in the near term.
With low credit growth, likely rise in credit costs and drag of excess liquidity, ICRA expects the profitability (RoA) of financial sector entities to be adversely affected by 50-90 bps during FY2021. fiinews.com
