India’s credit rating agency ICRA has reported that the gross non-performing assets (NPAs) of banks might worsen significantly by the end of this financial year.
According to the report, bank NPAs are likely to depreciate to 11.3-11.6% from 8.6% as of March 2020, due to Covid-19 disruptions.
The agency also stated that the fresh accretion of NPAs is estimated to be at 5-5.5% of the standard advances made by lenders to borrowers during 2020-21.
This will increase the credit provisions of the banks and impact their earnings, the report added.
During 2020-21, the credit provisions are expected to exceed the operating profits for the public sector banks (PSBs), which will represent a sixth consecutive year in losses.
The state-owned lenders will need INR450-825bn of capital infusion in the current financial year to address the increasing stress on asset quality and profitability.
ICRA financial sector rating head Anil Gupta said: “The RBI moratorium to borrowers was extended by another three months till 31 August 2020 and we expect the asset quality stress is likely to reflect only in third and fourth quarters of 2020-21 results.
“With thin capital cushions and the expected increase in stress on asset quality and profitability, we expect public sector banks to require INR450-825bn of capital even under a scenario of low credit growth of 3-4% during 2020-21.”
ICRA added that while lockdowns affected the debt-servicing ability of borrowers, the extent of economic revival when restrictions are eased will determine the residual impact on asset quality.
In the case of private banks, the profitability is expected to be moderate with return on equity (ROE) declining to 3.5-5.1% during 2020-21 compared to early forecasts of 10-12%.
ICRA said that the incremental credit growth of banks is expected to be INR6-7trn, which will represent a yearly credit growth of around 6-7%.
These figures will be derived when state-owned banks achieve 3.5-4.3% growth while private lenders record a 7-9% growth.