Bad loans of 41 banks may surge to ₹9 lakh cr by March, says ICRA

Gross non-performing assets (GNPAs) of 41 listed Indian banks are likely to collectively increase to ₹8.8-9.0 lakh crore by March-end 2018 from ₹7.65 lakh crore as at March-end 2017, according to credit rating agency ICRA.

The overall GNPAs of the aforementioned banks had increased to ₹8.28 lakh crore as at June-end 2017.

At ₹1.15 lakh crore, fresh non-performing assets during the June 2017 quarter were the highest in the last five quarters, with slippages coming in across corporate, medium and small enterprise (MSME) and agricultural segments, said the rating agency.

It maintained its estimate for fresh slippages at ₹3 lakh crore during FY18. In a report, ICRA observed that with only 11 per cent of fresh slippages during the quarter being from standard restructured loans, corporate slippages outside the vulnerable book continued.

Farm loan waivers by various State governments and expiry of dispensation allowed on classification of overdue small-ticket loans post demonetisation as NPAs, also contributed to the higher slippages in the agriculture and MSME sectors.

Karthik Srinivasan, Group Head – Financial Sector Ratings, ICRA, reasoned that the continued asset quality pressure in the large corporate segment, and higher slippages from the agricultural and MSME segments on account of the transient impact of the Goods and Services Tax (GST) resulted in an increase in NPAs.

“With the expected moderation of the GST impact and the likely release of payments by State governments against farm loan waivers, recoveries/upgrades will improve in these segments by end of FY18,” he said.

Additionally, any favourable outcome on the large corporate accounts referred under the Insolvency and Bankruptcy Code (IBC) would also support recoveries/upgrades during the year.

With higher credit provisions required on the ageing of NPAs and relatively low treasury gains, ICRA hinted at the possibility of another year of losses or low single-digit return on equity for public sector banks (PSBs).

“While gross NPAs of banks are likely to increase, with another year of elevated credit provisions at about 1.9-2.3 per cent of advances, we expect the net NPAs for the sector to reduce. We estimate net NPAs of 4.4-4.6 per cent by March 31, 2018, compared with 5.5 per cent as on March 31, 2017,” said Srinivasan.

On the other hand, private sector banks are expected to report return on equity of 10-12 per cent for FY18.

Underscoring that with losses during the June 2017 quarter, core equity levels of PSBs remain weak, Srinivasan said: “With weak internal capital generation, PSBs will require to raise a total equity capital of ₹90,000 crore to ₹1 lakh crore during FY18 and FY19 against the budgeted capital of ₹20,000 crore by the government for this period. “While the government has infused a large quantum of unplanned equity into one PSB during August 2017, the bank-wise capital infusion plan for FY18 is yet to be announced.”

The budgeted capital infusion is much lower than the total requirement of PSBs, and further support from the government needs to be watched, he said.

With savings deposit rate cuts of 50 basis points (bps) by many banks and expectation of 15-25 bps decline in cost of funds, ICRA expects a further cut of 10-15 bps in lending rate in the coming quarters.

It, however, does not expect a further cut in deposit rates, unless the government reduces rates of small saving schemes again.