Banks’ gross NPAs to fall in FY21 on restructuring, write-offs and economic resilience: CARE Ratings

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Gross non-performing assets (NPAs) are expected to decline in FY21 due to restructuring of accounts, loan write-offs and resilience in the economy, CARE Ratings said in a report on May 25. The rating agency expects the quantum of NPAs to fall to Rs 7.9 lakh crore at the end of FY21 from Rs 8.9 lakh crore in FY20.

Several regulatory and government support schemes helped borrowers access liquidity and conserve their cash flows during the year, the rating agency said. These schemes included the moratorium on loan repayments for six months till August 30, 2020, the COVID-related restructuring scheme for large corporates till December 31, 2020, and for micro, small and medium enterprises (MSMEs) till March 31, 2021.

Wholesale NPAs have been declining during FY21. Even though it was a challenging year, the quantum of gross NPAs of banks is expected to decline by the end of March 2021 due to write-offs, lower slippages, restructuring schemes and the ECLGS support for MSMEs. However, as anticipated with the vacation of the Supreme Court stay on recognition of NPAs after August 31, 2020, the FY21-end numbers are expected to be either similar or slightly above the Q3FY21 numbers, CARE Ratings said.

Public sector banks (PSBs) accounted for more than 80 percent of banks’ NPAs till FY19. Over the last couple of years, the PSBs registered a substantial contraction in their GNPA amount to an estimated Rs 6 lakh crore at the end of March 2021 from Rs 6.8 lakh crore at the end of March 2020. The gross NPAs of private banks had remained within Rs 2 lakh crore since September 2017 till September 2019. “Unlike the PSBs, the private banks have recorded a rise in their GNPA amount from Rs 1.8 lakh crore in March 2018 which breached the Rs 2 lakh crore levels in December 2019 but subsequently are expected to have retreated to around Rs 1.96 lakh crore by the end of March 2021,” CARE Ratings said in the report.

Write-offs have played a major role in reducing bad loans. In the years before 2017-18, write-offs had a smaller share, but after FY18, the share has markedly increased, indicating that banks have cleaned their books by taking a hit. Recoveries have had a relatively smaller contribution in lowering NPAs.

This month, the Reserve Bank of India (RBI) has announced a second restructuring scheme for personal loans and MSME loans till September 30, 2021. The government has earlier extended the emergency credit line guarantee scheme (ECLGS) for MSMEs up to June 30, 2021.

In FY21, bank credit growth was muted as lenders and borrowers remained risk-averse amid uncertainty because of the pandemic. Bank credit growth was largely supported by the agriculture and retail segments and disbursements under the ECLGS scheme. Credit growth in the industry segment was slow. The growth in the retail segment was driven by a credit push by the RBI and interest rate concessions on home loans. It was further aided by various regulatory measures such as interest rate cuts and the cash reserve ratio exemption on loans to new MSME borrowers during FY21.