Forbearance is masking problem assets for Indian banks arising from Covid-19, according to a report by S&P Global Rating.
With loan repayment moratoriums having ended on August 31, 2020, S&P estimated that NPLs in the banking sector will likely shoot up to 10 per cent to 11 per cent of gross loans in the next 12-18 months, from 8 per cent on June 30, 2020.
Banks and other financial institutions will likely have trouble maintaining momentum after the proportion of non-performing loans (NPL) to total loans declined consistently so far in 2020, the credit rating agency said.
S&P forecast the banking system’s credit costs (as annualised loan loss provisions as a percentage of gross loans) will remain elevated at 2.2 per cent to 2.9 per cent this year and next, in line with its expectation of elevated credit cost for many other countries in the Asia-Pacific.
The agency underscored that resumption of economic activity, government credit guarantees for small to mid-size enterprises, and buoyant liquidity is helping to limit stress.
S&P’s NPL estimates are lower than previous, but it is still of the view that the sector’s financial strength will not materially recover until fiscal 2023 (ended March 31, 2023).
Restructuring
As per the agency’s projections, 3 per cent to 8 per cent of loans could get restructured. At this juncture, the agency believes that the system restructuring could be at lower end of its estimates.
“While financial institutions performed better than we expected in the second quarter, much of this is due to the six-month loan moratorium, as well as a Supreme Court ruling barring banks from classifying any borrower as a nonperforming asset,” said S&P Global Ratings credit analyst Deepali Seth-Chhabria.
Collection rates
Collection rates, which improved sharply in the second quarter to an average 95 per cent, may also wane, the agency said.
Given that overall economic activity levels remain soft, savings could deplete fast, potentially hurting future collections, it reasoned.
Bad loans sold to ARCs: Banks may have to increase provision for security receipts
S&P observed that banks and nonbank financial companies (NBFCs) have been strengthening their balance sheets and bolstering their equity bases.
Banks have also been building reserves and creating excess Covid provisions, which in its view should help them smooth the hit from Covid-related losses.
For NBFCs S&P rates, performance has been improving. Like with banks, collections have surged for NBFCs.
The agency observed that top-tier NBFCs are benefiting from surplus system liquidity, as indicated by a sharp reduction in risk premiums.
“Weaker finance companies, however, have faced higher risk premiums. We expect such polarisation to persist in 2021,” as per the report.