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Indian banks are sitting on unrecognised stressed loans worth ₹7.7 lakh crore, and corporate and SME loans aggregating ₹2.60 lakh crore could potentially be recognised as stressed loans by FY19, said India Ratings and Research (Ind-Ra).
The credit rating agency’s study pegs stressed corporate and SME debt at 22 per cent of total bank credit.
“While a sizeable proportion of the unrecognised stressed exposure has strong group linkage or some form of parental support, potentially half of it could further slip in the next 12-18 months. The recognised stressed corporate and SME loans in the system stands at around 12 per cent of total bank credit,” said the study.
In the report ‘FY18 bank outlook: Long tail of credit costs to subdue profitability despite plateauing stressed assets’, Ind-Ra assessed that impaired assets will peak at 12.5-13 per cent by FY18/FY19.
“Credit costs, however, will show an extended recovery period (FY18 forecast: 185 basis points (bps); FY16: 230 bps), as a large proportion of recently-acquired higher-bucket non-performing loans keep ageing.
“This will keep the return on assets (RoAs) for public sector banks and private sector banks at around 20 bps below their respective long-term medians,” the study said. One basis point equals one-hundredth of a percentage point.
India Ratings estimated that of the total unrecognised stressed book that banks are sitting on, around 1.8 per cent is to stressed public sector units, around 2 per cent of it either enjoys some group support and could flow to the joint lender forum or would be subject to asset sale, around 2.9 per cent could be the addition to the restructured book from infrastructure projects and 3.2 per cent is the potential slippage in the next 12-18 months.
A break-up of stress shows that the sectors that have the highest unrecognised stressed exposure include infrastructure, power, telecom and real estate, among others.
The agency elaborated that “while the iron and steel sector has seen lot of stress recognition in the asset quality review exercise conducted by the RBI in the last fiscal, provisioning continues to remain inadequate. Some sectors, including infrastructure and real estate, have lower amount of stress recognised as in many cases they enjoy group support.”
On the discrepancy in banks’ recognition of bad assets, Ind-Ra said much of the unrecognised bad loans will start trickling in over 12-18 months.
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