Gross non-performing assets (NPAs) of banks will rise to 8-9 per cent this fiscal, well below the peak of 11.2 per cent seen at the end of fiscal 2018. The Covid-19 relief measures such as the restructuring dispensation, and the Emergency Credit Line Guarantee Scheme (ECLGS) will help limit the rise.
With 2 per cent of bank credit expected under restructuring by the end of this fiscal, stressed assets - comprising gross NPAs and loan book under restructuring - should touch 10-11 per cent.
Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings, said the retail and MSME segments, which together form 40 per cent of bank credit, are expected to see higher accretion of NPAs and stressed assets this time around. Stressed assets in these segments are seen rising to 4-5 per cent and 17-18 per cent, respectively, by this fiscal end. The numbers would have trended even higher but for write-offs, primarily in the unsecured segment.
“The retail segment, which had a relatively stable run over the past decade, has been signed by the pandemic, with salaried and self-employed borrowers alike facing significant income challenges and higher medical expenses, especially in the second wave. Thus, in a first-of-its-kind move, the Reserve Bank of India (RBI) introduced loan restructuring for retail borrowers to help them tide over the situation. This followed a six-month moratorium permitted by lenders last fiscal,” he said.
Despite the measures, CRISIL Ratings believes stressed assets in the retail segment will rise to 4-5 per cent by the end of this fiscal from 3 per cent last fiscal. While home loans, the largest segment, will be the least impacted, unsecured loans are expected to bear the brunt of the pandemic.
The corporate segment, though, is expected to be far more resilient. A large part of the stress in the corporate portfolio had already been recognised during the asset quality review initiated five years ago.
That, coupled with the secular deleveraging trend, has strengthened the balance sheets of corporates and enabled them to tide over the pandemic relatively unscathed compared with retail and MSME borrowers. This is evident from restructuring of only 1 per cent in the segment. Consequently, corporate stressed assets are expected to remain range-bound at 9-10 per cent this fiscal.
The rural segment, which was hit harder during the second wave of the pandemic, has also seen a strong recovery. Therefore, stressed assets in the agriculture segment are expected to remain relatively stable.
Sri Narayanan, Director, CRISIL Ratings, said, “while the performance of the restructured portfolio will definitely need close monitoring, the slippages from the restructured book are expected to be lower this time. Restructuring under various schemes in the past focussed on larger exposures and primarily involved extension of maturity without any material haircuts, resulting in high subsequent slippages."
"This time, the entry barriers for restructuring are more stringent. Also, recent trends indicate that a reasonable proportion of borrowers, primarily on the retail side, have started making additional payments as their cash flows improve, despite having availed of restructuring. MSMEs, however, may take longer to stabilise and we remain watchful," he added.
The estimates of CRISIL Ratings are predicated on a base-case scenario of 9.5% GDP growth this fiscal and continued improvement in corporate credit quality. A virulent third wave and significant deceleration in demand growth could pose significant downside risks to these estimates. On the other hand, operationalisation of the National Asset Reconstruction Company Ltd by the end of this fiscal and the expected first-round sale of Rs 90,000 crore NPAs could lead to lower reported gross NPAs.