The asset quality of banks has surprised positively with decline in reported Gross NPAs and Net NPAs to 7.6% and 2.5% respectively as on March 31, 2021 compared to 8.60% and 3.0% respectively as on March 31, 2020[1]. This was despite much lower estimates of loan restructuring at ~1.3% of advances as against 5-6% estimated earlier by us. The fresh NPA generation has also declined to Rs. 2.6 trillion (2.7% of advances) in FY2021 compared to Rs. 3.7 trillion (4.2%) in FY2020. As per an ICRA, the headline asset quality numbers of banks do not reflect the underlying stress on the income and cash-flows of the borrowers impacted because of Covid-19. Various regulatory and policy measures such as moratorium on loan repayment, standstill on asset classification and liquidity extended to borrowers under Emergency Credit Line Guarantee Scheme (ECLGS) had a positive impact on reported asset quality of lenders. However, as the overdue loan book continuing to remain at elevated levels, the second wave could push some of these borrowers into NPAs in H1 FY2022.
In this backdrop, the Reserve Bank of India (RBI) also extended the restructuring scheme for retail/MSME Loans till September 30, 2021 and recently the Government of India (GoI) also upsized the ECLGS funding to Rs. 4.5 trillion from Rs. 3.0 trillion budgeted at time of first wave. While this is likely to increase the indebtedness of the borrowers, it could provide temporary liquidity relief to tide over the crisis induced by second wave.
In absence of standstill on asset classification, we expect the fresh NPAs generation to be higher, however we also expect the recoveries and upgrades to improve in FY2022. This coupled with a credit growth of 7.3-8.3% in FY2022 (5.5% in FY2021), the GNPAs and NNPAs are expected to decline to 6.9-7.1% and 1.9-2.0% respectively by March 31, 2022.
With declining NNPAs over past few years and lower slippage in FY2021, the credit provisions for the banks moderated to 2.5% of advances in FY2021 compared to 3.7% in FY2020, even as the core operating profits improved with the cost curtailments measures. The gain on bond portfolios provided an additional boost to the bottom-line with Return on equity for the sector improving to 7.5% in FY2021 from (5.1%) in FY2020.
Commenting on developments, Mr. Anil Gupta, Vice President – Financial Sector Ratings, ICRA Ratings says, “Within the sector, the turnaround was remarkable for public sector banks which reported profits after five consecutive years of losses and with NNPAs at lowest levels seen over last six years (3.1% as on March 31, 2021), ICRA expects the public sector banks (PSB)s to remain profitable going forward.”
Coming to capital position, PSBs raised Rs.120 billion (0.2% of risk weighted assets – RWAs) and private banks (PVB)s raised Rs. 536 billion (1.3% of RWAs) of equity capital from market sources during FY2021. In addition, GoI 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 and improved profitability, the Tier I capital position of PSBs improved to 11.55% as on March 31 2021 from 10.3% as on March 31, 2020, while for PVBs, it improved to 16.8% from 14.9% during the above mentioned period.
Concludes Mr. Gupta, “Improved capital position coupled with lower NNPAs means better solvency profile as well as improved outlook on ability to support growth and better future profitability. We believe that the banks are relatively better placed to handle the stress from second wave and hence we continue to maintain stable outlook on the sector.”