MUMBAI: Although Indian banks reported a decline in bad loans in the December quarter, the impact of the pandemic-induced disruptions on asset quality will be spread over FY21 and FY22, with bad loans expected to rise to 9.6-9.7% by 31 March, 2021, and to 9.9-10.2% by 31 March, 2022.
Banks had seen their gross and net non-performing assets (NPAs) improve in Q3. Despite including pro forma bad loans of about Rs1.3 trillion, gross NPA ratio stood at 8.3% compared with 8.6% as on 31 March, 2020.
Premium Icra believes that the decline seen till December was also driven by loan write-offs of Rs1.1 trillion during the first nine months of FY21. Also, based on the restructuring guidance given by various banks, the overall volume of recast debt is estimated at 1.3-1.5% of the advances, much lower than initial estimates.
Anil Gupta, sector head (financial sector ratings) at Icra, said while the headline asset quality and restructuring numbers are encouraging, these do not 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 FY21 and FY22 as various interventions and relief measures have prevented a large one-time hit on profitability and capital of banks," said Gupta.
Moreover, in spite of the impact of covid-19 pandemic on debt servicing capability of borrowers, fresh slippages or incremental bad loans stood much lower at Rs1.8 trillion during the April-December period compared with Rs3.6 trillion during FY20.
According to the rating agency, this improvement in asset quality 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. However, as the impact of these interventions wanes off, the asset quality pressures are likely to resurface, it said.
However, the net NPA position of the banks is expected to be relatively lower because of significant provisions made by banks on their legacy bad loans. Therefore, with the decline in net NPAs and improved capital position driven by fresh capital raise during FY21 as well as internal accruals buffered by sharp decline in bond yields, the solvency position for the banks stands relatively better.
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Premium Premium State-owned banks raised Rs12,000 crore and private banks raised Rs53,600 crore of equity capital from market sources during FY21. In addition, the government infused Rs20,000 crore in public sector banks as part of its budgeted recapitalisation for FY21.
Following the capital raise, the tier 1 capital position of public sector banks improved to 10.99% as on 31 December from 9.7% as on 31 March, 2020, while for private banks, it improved to 16.66% from 14.1%.
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