Tackling non-performing assets will be a major challenge for the banking sector in the new year as many companies, especially in the MSME sector, may not be able to withstand the heat of the coronavirus pandemic which led to a historic contraction of the economy in the first half of the current fiscal.
Besides, muted private investment impacting the corporate loan growth will be another challenge that banks will have to face in the coming months.
Despite ample liquidity in the system, demand from the corporate sector is very low and bankers hope that faster than anticipated recovery could bring in the animal spirit as far as India Inc in concerned.
Although the Indian economy witnessed a sharp recovery from 23.9 percent contraction in first quarter to 7.5 percent contraction in the second quarter, it is yet to lift the sentiment of India Inc. For the past few years, private investment has been low while public spending has been doing the heavy lifting for the economy.
As far as the banking sector is concerned, the outbreak of the pandemic early in 2020 largely shaped activities and operations during most part of the year.
The legacy of rising NPAs (non-performing assets) continued to mar the banking sector and the first major shock came in March with the Reserve Bank of India (RBI) imposing moratorium on the then crisis-hit Yes Bank.
By the time Yes Bank's issue was resolved, the country was in the grip of the outbreak of the COVID-19 pandemic leading to nationwide lockdown and even the Budget session of Parliament had to be curtailed.
However, the government did not postpone the process of merger of six public sector banks into four anchor lenders with a view to create global-size institutions for achieving the objective of $5 trillion economy by March 2025.
Effective April 1, United Bank of India and Oriental Bank of Commerce were merged with Punjab National Bank, making it second largest Public Sector Bank (PSB).
Similarly, Andhra Bank and Corporation Bank were merged with Mumbai-based Union Bank of India. Syndicate Bank was merged with Canara Bank while Allahabad Bank was amalgamated with Chennai-based Indian Bank.
"The merger has nearly stabilised... It happened very seamlessly despite the lockdown and the early positive signs of the amalgamation are now also visible," Financial Services Secretary Debasish Panda told PTI.
"They now have a larger capital base and their capacity to lend has increased, and then you have complementary products of the different banks that merged into the lead banks," he said.
To provide relief to millions of borrowers who faced disruption in their income due to the lockdown, banks under the guidance of RBI extended moratorium for six months till August.
As a result, recognition of NPAs was put in abeyance during the period and subsequently the Supreme Court put a stop on fresh NPA recognition till further orders.
On the direction of the apex court, banks were asked to waive compound interest portion of loans up to Rs 2 crore for the six-month moratorium period beginning March 1, 2020.
Over 40 percent of the system credit and 75 percent of the borrowers benefited from the decision and it also resulted in an additional burden of around Rs 7,500 crore for the government.
For the large corporates, banks, under the direction of RBI, have implemented a one-time restructuring of loans within strict parameters. Companies under stress have been given time till December to avail the scheme.
Coming to the issue of credit offtake, the core job of banks, it remained muted during most part of the year. However, disbursal of agriculture and retail loans gather substantial momentum from September onwards.
"We have seen that there is a steady uptick in the credit growth. The retail loan, home loan and agriculture loan have picked up and MSME, again, with the intervention of the government through the ECGLS and other similar schemes also has picked up," Panda said.
There is some subdued growth in the corporate segment, he said, adding that banks and the government are working together to revive demand for corporate loans and recently, the ECGLS was extended to more distressed sectors.
Under the Emergency Credit Line Guarantee Scheme (ECLGS), banks have sanctioned loans worth Rs 2.05 lakh crore to 81 lakh MSMEs that were impacted by disruptions caused due to the pandemic.
Coming to the worrisome part, the jury is still out on the trajectory of bad loans. One school of thought is that NPAs are bound to increase largely because of MSMEs but bankers and policymakers are not that pessimistic.
Gross NPAs of all banks may jump to 12.5 percent by the end of this fiscal under the baseline scenario from 8.5 percent in March 2020, according to the Financial Stability Report (FSR) released by RBI in July.
Under baseline scenarios, state-owned banks' GNPA ratio may increase to 15.2 percent by March 2021 from 11.3 percent in March 2020. The GNPA ratio of private banks and foreign banks may increase from 4.2 percent and 2.3 percent to 7.3 percent and 3.9 percent, respectively, over the same period.
However, due to faster than anticipated recovery, there is an uptick in the banking sector as well and most of the banks, including private sector lenders, have posted good profits during the July-September quarter. This was mainly on account of treasury income and reduction in NPAs.
"We don't anticipate a big shock to hit public sector banks next year given the high provision coverage ratio, steady decline in non-performing assets (NPA), and one-time restructuring corporate, among others things," Panda said.
About the financial health of banks, Panda said that 11 out of the 12 public sector banks posted profit in the last quarter. Even gross NPAs have gone down substantially and the provision coverage ratio has increased, he added.
To cushion against future shock, the secretary said that public sector banks have raised Rs 40,000 crore in the form of equity, and bonds and another Rs 25,000 crore would be raised in the next three months.
Besides, the government has allocated Rs 20,000 crore for capital infusion into PSBs in the current fiscal. Of this, the finance ministry has granted Rs 5,500 crore to Punjab & Sind Bank to meet regulatory requirements.