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ICRA warns of significant jump in bad loans in current fiscal year

Bad loans of Indian banks could rise significantly in the current fiscal year as government and the Reserve Bank of India rollback regulatory and fiscal support measures, according to domestic rating agency ICRA. Banks could see gross bad loans rise to 9.7% at the end of the fiscal year March 2021 and 10.2% by the end of fiscal year 2022, estimates.

“While the headline asset quality and restructuring numbers are encouraging, these don’t reflect the underlying stress on asset quality of banks,” said Anil Gupta, Sector Head – Financial Sector Ratings, ICRA Ratings. “The level of loans in overdue categories has increased after upliftment of moratorium and the impact on asset quality will be spread over FY2021 and FY2022 as various interventions and relief measures have prevented a large one-time hit on profitability and capital of banks.”

Gross bad loans were at 8.6% as on March 2020 and 8.3% (proforma basis) at the end of December 2020. This decline was largely driven by loan write-offs of Rs 1.1 lakh crore during nine months of the fiscal year ending March 2021.

The ratings firm – a local unit of Moody’s in India, expects, loan restructuring at 1.3-1.5% of the advances, much lower than its initial estimates. Despite the impact of Covid-19 pandemic on debt servicing ability of borrowers, the gross fresh slippages for banks stood much lower at Rs 1.8 lakh crore at the web of December 2020,

as compared to Rs. 3.6 lakh crore same time the year prior.

This has been driven by various relief measures such as moratorium on loan repayment, standstill on asset classification and liquidity extended to borrowers under Guaranteed emergency credit line (GECL). As the impact of these interventions wanes off, the asset quality pressures are likely to resurface, the agency noted.

The ratings firm has also noted that despite the asset quality challenges improved capital position driven by fresh capital raise during the fiscal year gone by as well as internal accruals that were buffered by sharp decline in bond yields, the solvency position for the banks stands relatively better providing some comfort to their loss absorption abilities.

“As against our estimates of Tier-I capital Rs. 32800-43100 crore of capital requirements, which factor in Rs 23300 crore of AT-I bonds, where call option is falling due in FY 2022, the government has budgeted equity capital of Rs. 20000 crore for public banks,” said Gupta. “In case the AT-I markets remain dislocated in near term, the government may need to upsize the recapitalisation plan in public banks.”

The public sector banks have so far raised Rs.12,000 crore and private banks raised Rs. 53600 crore of equity capital from market sources during the fiscal year gone by. In addition, the government also infused Rs. 20,000 crore into the public banks as part of its budgeted recapitalisation for fiscal year 2021.

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