The report expects Gross NPAs and Net NPAs for banking sector likely to reduce to ~10 percent and 4.3 percent, respectively by March 2019.
Losses for public sector banks (PSBs) in the financial year ending March 2019 could be in the range of Rs 41,900 crore and Rs 1.02 lakh crore, according to ICRA Ltd.
As per the rating agency's report, the losses before tax for PSBs for FY2019 are estimated at Rs 419-1016 billion depending on the credit provisioning on stressed assets undergoing resolution.
This is compared to a loss before tax of Rs 24,000 crore during Q1 FY19 (April to June 2018) and Rs 1.30 lakh crore that PSBs reported in FY2018.
The cumulative loss after tax for PSBs had crossed Rs 87,357 crore in the 2017-18 fiscal, with Punjab National Bank (PNB) topping the list followed by IDBI Bank. These losses surpassed the capital infusion of Rs 90,000 crore by the Government of India during FY18 and can likely surpass the budgeted capital infusion of Rs 65,000 crore for FY19.
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Out of 21 state-owned banks, only Indian Bank and Vijaya Bank had posted profits in 2017-18 owing to the spike in non-performing assets (NPAs) and provisions towards the same.
NPA outlook
On the positive side, the fresh slippages (bad loans) for the banking sector during Q1FY19 moderated to Rs 92,000 crore as compared to Rs 2.44 lakh crore during Q4FY18 and Rs 5.37 lakh crore during FY18.
"With ongoing resolution of stressed assets, despite fresh slippages, we expect Gross NPAs and Net NPAs for banking sector are likely to reduce to ~10 percent and 4.3 percent respectively by March 2019; the same may be higher at 12.2 percent and 5.6 percent respectively in absence of resolution," Gupta added.
The Gross NPA ratio was at 11.52 percent as of June end as compared to 11.68 percent as of end-March 2018 while net NPAs stood at 5.92 percent as of June end from 6.27 percent in March.
NPA resolution impact
Even as the pickup in pace of resolution is positive, tough times are expected to continue for banks given the limited recoveries being witnessed in many earlier cases undergoing resolution, except for accounts belonging to steel sector, the ICRA report said.
"With about 85-90 percent of these NPAs belonging to PSBs, the recoveries from these accounts will be a major driver of their profitability and the capital requirements during the current fiscal. Assuming 60-65 percent provisioning requirements on accounts to be resolved and normal slippages of about 3.00 percent for FY2019, the credit provisions for PSBs are estimated at Rs 1.4-2.0 lakh crore for the year (Rs 2.71 lakh crore during FY2018)," it added.
Factoring in the marked to market losses on bond portfolios will lead to many PSBs reporting losses during FY2019 as well.
As many as 60 percent of NPAs worth Rs 4 lakh crore are under active resolution under the insolvency and bankruptcy code (IBC), as per the report.
"With Rs 4.0 trillion (Rs 4 lakh crore) of debt across 40 large borrowers already under RBI directed resolution through IBC and likelihood of more large borrowers being resolved under IBC, about 60 percent of the non-performing assets - NPAs (including loans earlier written off) of Indian banking sector are now under active resolution," said Anil Gupta, Head – Financial Sector Ratings, ICRA Ltd.
With expiry of 180-day period extended in February 12, 2018 circular of Reserve Bank of India (RBI) for resolution of large stressed borrowers, and limited number accounts where banks have been able to implement a resolution plan, many of the 70 large borrowers accounting for approximately Rs 3.8 lakh crore of debt may be heading for resolution under IBC.