Gradual recovery in the credit quality of corporates driven by higher commodity prices, lower interest rates, improved capital structures, and efficiency gains to limit the increase in stressed loans.
Stressed assets in the banking system are not expected to rise significantly from current levels of Rs 11.5 lakh crore, or 14 percent of total advances, suggests a report by Crisil Rating agency.
Crisil said it "does not expect this number to increase significantly over the medium term. That's because of gradual recovery in the credit quality of corporates driven by higher commodity prices, lower interest rates, improved capital structures, and efficiency gains".
According to the report, about two-thirds of the overall stressed assets in the banking system has already been recognised by banks as non-performing assets (NPAs) as on March 31, 2017. And the stressed assets including both reported gross NPAs and standard assets that are under pressure currently and could deteriorate into NPAs over the medium term, it said.
The assets under pressure mostly comprise not-yet-recognised bad loans (recognised as NPA in one bank, but not in others), restructured standard accounts, and stressed assets structured under the Reserve Bank of India resolution schemes such as SDR (strategic debt restructuring), 5:25 refinancing and S4A (Scheme for Sustainable Structuring of Stressed Assets).
Crisil expects gross NPAs in the banking system to be approximately 10.5 percent of advances as of March 2018, up from 9.5 percent as of March 2017.
Faster resolution of stressed accounts through the Insolvency and Bankruptcy Code (IBC) and various structuring schemes, therefore, is critical to improving the asset quality of banks. The infrastructure, power, engineering, and construction sectors contribute the bulk of the stressed assets in the banking system.
“With the majority of stressed assets now recognised as NPAs, the rest of the corporate loans portfolio of banks can be expected to perform better over the medium-term. However, the performance of MSME (micro, small and medium enterprises) and agriculture loans could see some deterioration mainly due to the impact of Goods and Services Tax (GST) and farm loan waivers, respectively. But these are unlikely to stress bank balance sheets the way large corporate NPAs did,” said Gurpreet Chhatwal, President, Crisil Ratings.
The agency expects fresh NPA creation to decelerate this fiscal year, but the overall stock would continue to rise because slippages would still outpace recoveries.“In the past couple of years, recoveries by banks have been poor and the bulk of the reduction in gross NPAs has been because of higher write-offs. Sluggish economic growth, continued stress in some sectors, and slow pace of resolution proceedings have been constraining recoveries,” said Krishnan Sitaraman, Senior Director, Crisil Ratings.