For Banks, No Respite From Bad Loans This Year | SupportBiz

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For Banks, No Respite From Bad Loans This Year

Tags: bank, bank loan
Bad loans are seen rising mainly because of withdrawal of regulatory forbearance on restructuring

Private banks will grow at twice the pace of capital hobbled PSBs in the next four years, says CRISIL. CRISIL believes the government’s stance to provide capital only to public-sector banks (PSBs) meeting its performance thresholds –even as they reel under asset quality and profitability pressures –will force many to grow at a significantly slower pace.

In the current fiscal, gross non-performing assets (NPAs) of Indian banks are seen edging up by 20 basis points (bps) to 4.5 per cent of advances or rise by Rs.600 billion to Rs.4 trillion. Weak assets are expected to stay high at 6 per cent (Rs.5.3 trillion). Worryingly, exposure of banks to vulnerable sectors is expected to remain high, just the way it was in 2014-15.

Bad loans are seen rising mainly because of withdrawal of regulatory forbearance on restructuring, and high slippages from restructured assets. As much as 40 per cent of assets restructured between 2011-14 have degenerated to NPAs.

Says Pawan Agrawal, Chief Analytical Officer, CRISIL Ratings: ‘‘Going forward, the latitude now afforded to flexibly structure project loans (under 5/25 scheme) will enable lower slippages from large exposures. However, it can partially mask asset-quality pressures as reported NPAs may not be a true reflection of the extent of stress in banks.’’

CRISIL’s calculations show about Rs.800 billion of stressed loans could be structured under the 5/25 scheme during 2015-16.

Given all this, banking sector profitability will remain weak with return on assets (RoA) staying flat at 0.8 per cent in the current fiscal. Private-sector banks will continue to outperform the industry with RoA of 1.6 per cent compared with 0.5 per cent for PSBs.

As for capital, with majority shareholder government changing stance, PSBs will now have to fend for themselves for growth capital.

Says Rajat Bahl, Director, CRISIL Ratings: ‘‘Generation of capital

won’t be easy for PSBs given their muted profitability and difficulty in diluting government’s stake because of poor valuations. Also investor appetite for non-equity Tier I instruments is yet to be fully tested.  Consequently, we expect PSBs to grow at half the pace of private-banks for the next four years.’’

To meet Basel III regulations, banks needed to raise Rs.4.7 trillion till March 31, 2019, of which Rs.1.0 trillion has been raised so far. The slowdown in growth of PSBs will have beneficial rub-off of reducing their capital requirement by Rs.300 billion. This will, however, be replaced by higher requirements by private banks given their faster pace of growth. In all, PSBs will now have to raise Rs.2.6 trillion and private banks Rs.1.1 trillion upto March 2019.

Given this context of capital infusion from the government, CRISIL’s ratings will have greater linkage with standalone credit -profile of PSBs. Already, 9 out of 25 rated PSBs have a ‘Negative’ outlook.


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