India Ratings and Research (Ind-Ra) today revised outlook on the banking sector from “stable” to “negative” for the second half commencing October 2020 (H2FY21) on an expected spike in stressed assets and higher credit costs. Banking sector may show weaker earnings on account of interest reversals and lower fee income.
The growth prospects are muted in the wake of the measures taken to contain the spread of Covid-19. Additionally, capital buffers for most public sector banks (PSBs) remain modest.
As per Ind-Ra’s bear case, the spike in stressed assets due to pandemic is expected to double the credit costs for banking system than estimated pre-Covid-19 levels for FY21.
It revised outlook on PSBs from stable to negative. Their modest capital buffers are expected to deplete further in FY21, due to provisioning requirements. Also, pre-Covid profitability expectations for FY21 would be belied and most banks are likely to report net losses.
State-owned banks may also need to continue to build-up their provision cover in FY22 for restructured assets as some of the restructured assets could turn NPA in FY23. PSBs could require Rs 35,000-55,000 cr in H2FY21 for Tier 1 ratio of 10 per cent. Covid-19 or contingent provisions are much lower than that for private banks.
Rating agency maintained stable outlook for private banks and said they are better placed to withstand the challenges presented by the pandemic. Most large banks have strengthened their capital buffers, built contingent provisions and have been proactive in managing the loan portfolio.
The system’s credit growth could remain anaemic, and short-term financial performance could deteriorate modestly. The large banks may benefit from credit migration. As opportunities arise, these banks are in a position to gain substantial franchise growth in the medium term, given that they have also added to their capital buffers over the past few months, it added.
Loan restructuring would provide flexibility to pursue temporary relief measures. Under the new restructuring framework lenders would be able to handhold those borrowers who have been temporarily impacted by Covid-19 but are otherwise viable. Certain stressed assets, though not at the risk of an immediate slippage, could also be restructured.
As per Ind-Ra’s estimates, total restructuring would be to the tune of 7.7 per cent ( Rs 8.4 trillion) of the total bank credit at end-March 2020. This includes corporate and non-corporate segments that could get restructured or if they do not qualify for restructuring, they may slip. It could be higher, if the restructuring in non-corporate segments exceeds 1.9 per cent of the total bank credit.
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