Banks to see their gross ANP increase by almost 10% by year-end: report

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Even as the economy emerges from last year’s crisis, India’s banking sector problems are far from over. The reason for this is the large number of bank loans that were classified in the “delinquent categories” after customers opted for moratoriums and loan restructuring.

While the loan moratorium period has ended, the relief offered in the form of restructuring is not yet over. After the end of the restructuring period, these loans face a sharp increase in the number of non-performing assets (NPAs).

An ICRA report expects banks’ gross NPAs (excluding write-offs) to increase from 9.6% to 9.7% by March 31, 2021. The rating agency further predicts that GNPAs will increase by more than 10% by March 31, 2022. Therefore, it is a large increase over GNPA of 8.6% as at March 31, 2020.

Read | Bank NPAs could increase by more than 10% in the first half of 2021: Survey

The sharp rise in GNPA will sharply deteriorate the quality of banks’ assets, spread over FY21 and FY22.

The report, however, states that on a pro forma basis, gross and net PNAs for banks were lower as of December 31, 2020, compared to March 31, 2020, and the estimated loan restructuring of 1.3-1.5% is fine. lower than initial estimates.

ICRA has also warned that the second wave of Covid-19 may have a serious impact on economic recovery and that the large increase in delinquent loans on banks’ books remains controllable.

The report also suggested that large gains on bond portfolios provided a cushion to bank profitability in FY21. While bank GNPAs are expected to increase, the report expects the government to postpone the allocation. of capital pending for fiscal year 21 to recapitalize public banks during fiscal year 22.

Explained: Why Indian Banks Will Face A Major NPA Challenge In 2021

BAD CREDITS ON THE RISE

The ICRA said that despite a decrease in the gross and net NPA reported by banks as of December 31, 2020, compared to March 31, 2020, the quality of banks’ assets remains controllable.

He explains that even including pro forma GNPAs of Rs 1.3 billion (1.1% of gross advances) and net NPAs of Rs 1 billion (1% of net advances), as of December 31, 2020, GNPA and NNPA of banks were at 8.3% and 2.7%, compared to 8.6% and 3% respectively as of March 31, 2020.

The ICRA says the drop was caused by loan cancellations of Rs 1.1 trillion (1% of advances) in the first nine months of FY21.

In addition, on the basis of restructuring guidance given by various banks, the overall volume of restructured advances is estimated at 1.3-1.5 percent of advances, which is much lower than initial estimates by ICRA.

Read also | Rise in bad loans could hit banks hard in 2021, RBI report warns

Commenting on this, Anil Gupta, Head of Financial Sector Ratings, ICRA Ratings, said: “While the asset quality and restructuring figures are encouraging, they do not reflect the underlying pressure on quality. of bank assets. The level of loans in the overdue categories increased after the lifting of the moratorium and the impact on the quality of the assets will be spread over the 2021 and 2022 financial years, as various interventions and relief measures have prevented a significant one-off hit on the profitability and capital of banks. “

The rating agency pointed out that despite the impact of the Covid-19 pandemic on the debt service capacity of borrowers, the new gross slippages for banks were well below Rs 1.8 trillion (2.7 % of advances on an annualized basis) in the first nine months of FY21 compared to Rs. 3.6 trillion (4.1%) in FY20.

ICRA explains that this was motivated by various relief measures such as the moratorium on loan repayments, a standstill on asset classification and the liquidity extended to borrowers under the secured emergency line of credit. (GECL).

While in the March 2021 Monthly Economic Review, the government stated that “India is now well armed to tackle any downside risk posed by the recent increase in COVID-19 cases,” ICRA pointed out to some. problems for banks.

]The rating agency has warned that as the impact of government interventions wears off, banks could again face pressures on asset quality.

ICRA expects GNPA (excluding depreciation) to increase to 9.6-9.7% by March 31, 2021 and 9.9-10.2% by March 31, 2022, compared to 8.6% as of March 31, 2020.

However, the agency cushioned the warning with a jumper. He said: “Despite the increase in the number of GNPA securities, the banks’ NNPA position is expected to be relatively lower due to the significant arrangements made by banks on their old NPAs.”

The government has already prepared for this increase. In the 2021 Union budget, Finance Minister Nirmala Sitaraman announced a provision for the creation of “bad banks” which will be managed professionally to take over assets in difficulty and help banks realize some of their NPAs.

Debasish Panda, secretary for financial services, told India Today TV that “failed banks” will make it easier for banks. They will take care of the old NPAs as well as the stress that arose during the blockages.

CIFAR EVALUATION

The CIFAR assessment alleviates the government’s concerns somewhat as it said: “Even on a pro forma basis, the NNPAs were lower as of December 31, 2020 compared to March 31, 2020. While the NNPAs are expected to increase slightly for reach 3.0-3.1%. by March 31, 2021 (2.7% as of December 31, 2020 and 3% as of March 31, 2020), CIFAR expects them to decline from 2.3 to 2.5% by March 31, 2022.

The banks’ solvency position is relatively better and will bring some comfort to their loss absorbing capacities, with a drop in NNPAs and an improvement in the capital situation due to the new capital raised during fiscal year 2021 as well. only internal provisions which were amortized by a sharp drop in bonds. yields.

Public banks have raised 120 billion rupees (0.2% of risk-weighted assets – RWA) and private banks have raised 536 billion rupees (1.3% RWA) of equity from market sources during the year 21.

In addition to equity raised by public and private banks, the government also injected 200 billion rupees (0.3% of RWA) into public banks as part of its budgeted recapitalization for fiscal year 21.

This capital increase made it possible to maintain the health of the banking system.

ICRA said: “The level I capital situation of public banks has improved to 10.99% as at December 31, 2020, compared to 9.7% as at March 31, 2020, while for private banks it has improved. ‘improved to 16.66% from 14.1% during the period mentioned above.

In a statement, Anil Gupta said: “Compared to our estimates of Tier-I Rs. 328-431 billion capital requirements, which takes into account Rs 233 billion of AT-I bonds, where an option purchase matures in FY 2022, the GoI has budgeted Rs 200 billion of equity capital for public banks for FY 2022. In the event that AT-I markets remain dislocated in the short term, the GoI may have to step up the public bank recapitalization plan. “

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