The credit provisions will continue to exceed the operating profits for the public sector banks (PSBs) during FY21, translating into sixth consecutive year of loss, according to credit rating agency ICRA.
ICRA estimates the gross non-performing asset (NPAs) could rise to 11.3-11.6 percent by March 2021 from an estimated level of 8.6 percent for March 2020, with a fresh gross slippage of 5.0-5.5 percent of standard advances during FY2021 (~4.2%E in FY2020).
The credit rating agency estimates that PSBs will need an estimated capital infusion of Rs. 450-825 billion as against earlier estimated Rs 100-200 billion even under a scenario of low credit growth of 3-4 percent for FY2021.
The uncertainty on the asset quality of banks remains high with almost 30-40 percent of the loan book across various banks under moratorium announced by the Reserve bank of India (RBI).
Further, while the lockdown has surely impacted the debt servicing ability of borrowers, the extent of revival in economic activities as the restrictions are eased will drive the final impact on the asset quality of banks.
ICRA estimates that even if 10-20 percent of these borrowers were to default, the slippage rate for banks could rise to 3-8 percent of advances.
“The RBI moratorium to borrowers was extended by another three months till August 31, 2020, and we expect the asset quality stress is likely to reflect only in Q3FY2021 and Q4FY2021 results,” Anil Gupta, Sector Head – Financial Sector Ratings, ICRA Ratings said.
“The ability of the borrowers and lenders to control the forward flows in overdue buckets will remain critical to preventing a sharp rise in NPAs,” he added.
Impact on earnings & investors appetite:
The agency is of the view that with expectations of higher slippages, the credit provisions for banks are likely to rise and have an adverse impact on their earnings.
The profitability of private sector banks (PSBs) will also moderate with return on equity (RoE) declining to 3.5-5.1 percent during FY21 as against earlier expectations of improvement to 10-12 percent.
With earlier expectations of improved asset quality and profitability, the capital requirements for PSBs were earlier estimated at Rs 100-200 billion for FY21, and the Government of India (GoI) had expected PSBs to raise capital from markets and hence possibly did not budget any capital infusion for FY21.
“With thin capital cushions and the expected increase in stress on asset quality and profitability, we expect PSBs to require Rs. 450-825 billion of capital even under a scenario of low credit growth of 3-4% during FY21. Further, the investors’ appetite towards these banks will continue to remain weak amid prevailing uncertainties” adds Gupta.
Incremental Growth:
ICRA also projects the incremental credit growth of banks during FY21 to be Rs. 6.0-7.0 trillion during FY21 (Rs 5.9 trillion during FY20) which will translate in a Y-o-Y credit growth of ~6.0-7.0 percent.
This will be driven by 3.5-4.3 percent growth by PSBs and 7.0-9.0 percent by PSBs. The few factors that could drive credit growth further will be the sovereign guarantee on loans extended to MSMEs, capitalisation of interest on loans under moratorium, and expected slowdown in external commercial borrowings.
Private banks are also expected to also raise capital to maintain higher capital ratios (cushion of 1.50-2.0% over regulatory Tier-I requirement of 9.5%) to absorb any asset quality-related shocks.
Accordingly, the estimated capital requirement for private banks will be between Rs 250-483 billion over FY21-FY22.
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