Bank NPAs to rise after three-year drop with two segments showing most stress: Crisil

Bad loans at Indian banks will likely increase in the current financial year after declining for three years in a row but will remain below the 2018 peak, credit ratings firm Crisil Ltd said Tuesday.

Gross non-performing assets (NPAs) of Indian banks will increase to 8-9% this fiscal year from 7.5% last year and 8.2% the year before. But it will still be lower than the 11.2% level touched at the end of March 2018, Crisil said.

However, the Covid-19 relief measures such as a restructuring mechanism and the Emergency Credit Line Guarantee Scheme (ECLGS) will help control the rise.

Crisil also said that around 2% of bank credit is likely come under restructuring by the end of this fiscal year. This means that total stressed assets, comprising gross NPAs and restructured loans, would touch 10-11%.

High levels of NPAs have hobbled growth in the Indian banking sector, and the broader economy, for the past few years as banks focused on cleaning up their books and credit growth slowed. The situation at most banks had been improving until the Covid-19 pandemic struck last year. While the government and the Reserve Bank of India last year offered loan moratoriums and announced other relief initiatives, bad loans are now set to climb higher.

Retail, MSME segments

Crisil said stressed assets in the retail segment will rise to 4-5% by the end of this fiscal year from about 3% last year. While home loans, the largest segment, will be the least impacted, unsecured loans are expected to bear the brunt of the pandemic, it said.

Similarly, asset quality of banks’ MSME (micro, small and medium enterprises) segment will worsen even though these businesses benefitted from the ECLGS and other government schemes. Many MSMEs will require restructuring to manage cash-flow challenges, Crisil said.

In fact, restructuring is expected to be the highest for this segment, at 4-5% of the loan book, leading to a jump in stressed assets to 17-18% by this fiscal-end from about 14% last fiscal, Crisil said.

“The retail and MSME segments, which together form around 40% of bank credit, are expected to see higher accretion of NPAs and stressed assets this time around,” said Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings.

“Stressed assets in these segments are seen rising to 4-5% and 17-18%, respectively, by this fiscal end. The numbers would have trended even higher but for write-offs, primarily in the unsecured segment,” Sitaraman said.

On the bright side, the corporate segment is likely to be more resilient. A large part of the stress in the corporate portfolio had been recognised during the asset quality review initiated five years ago, Crisil said.

“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,” it said.

This is evident from restructuring of only about 1% in the segment. Consequently, corporate stressed assets are likely to remain within the 9-10% range this year.

The rural segment, which was hit harder during the second wave of the pandemic in April-May, is also recovering. As a result, stressed assets in the agriculture segment are likely to remain relatively stable, Crisil said.