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India Ratings revises banking sector outlook to negative for H2 FY21

Mumbai: Domestic rating agency India Ratings and Research on Friday revised its outlook on the country’s banking sector to negative for the second half of this fiscal from stable due to the likely increase in stressed assets, credit costs and weak earnings. It expects restructuring/slippages pool from the corporate sector to be around Rs 3.3 lakh crore to Rs 6.3 lakh crore during the current fiscal.

The agency said it has revised its outlook in view of “an expected spike in stressed assets, higher credit costs, weaker earnings on account of interest reversals and lower fee income, and muted growth prospects in the wake of the measures taken to contain the spread of COVID-19”.

In the worst case, the spike in stressed assets due to the pandemic is expected to double the credit costs for the banking system than estimated pre-COVID-19 levels for FY21, it said.

It has revised the rating outlook on public sector banks (PSBs) to negative for the second half from stable, while maintaining a stable outlook for private banks, as they are better placed to withstand the challenges presented by the pandemic.

The agency in the report said state-run lenders’ modest capital buffers are expected to deplete further in FY21 due to provisioning requirements. Also, pre-COVID profitability expectations for FY21 would be belied and most banks are likely to report net losses.

These banks may also need to continue to build up their provision cover in FY22 for restructured assets as some of the restructured assets could turn NPA in FY23.

“PSBs’ could require Rs 350 billion-Rs 550 billion in H2 of FY21 for tier 1 ratio of 10 per cent,” the report said.

Under the new restructuring framework, lenders would be able to handhold those borrowers who have been temporarily impacted by COVID-19 but are otherwise viable.

As per the agency’s estimates, up to 7.7 per cent (Rs 8.4 lakh crore) of the total bank credit at end-March 2020 including corporate and non-corporate segments could get restructured or if they do not qualify for restructuring, they may slip.

The restructuring/slippages quantum from the corporate sector in FY21 could range between 3-5.8 per cent of the banking credit amounting to Rs 3.3 lakh crore-6.3 crore, the rating agency said.

The agency now estimates that agri (excluding farm credit) and micro, small and medium enterprises (about 25 per cent of advances in private banks and 32 per cent in PSBs) would contribute about 85 per cent of Rs 2.1 lakh crore (1.9 per cent of banking system credit) non-corporate restructuring, while retail will contribute remaining to the restructuring pool.

The credit costs of banks are estimated to range between 2.6-3.4 per cent in FY21 (2.9-3.8 per cent for PSBs and 2-2.6 per cent for private banks), depending on the quantum of pool getting restructured or slipping to NPAs, the agency said.

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