India’s lenders were recovering, until coronavirus set them back by years; NPAs to jump this fiscal

India’s largest public sector bank, State Bank of India, earlier this month announced that only one-fifth of its customers had availed the loan moratorium facility

India’s banking sector, after a series of reforms, was finally treading on the path of recovery where it was getting a grip of the bad assets and bringing credit costs in control, however, the coronavirus pandemic has dealt such a blow to the sector that recovery is now a distant dream. The coronavirus pandemic is expected to have hit India’s lenders so hard that nonperforming loans could hit a fresh high amidst rising credit costs, said global rating agency S&P Global in a recent report. India’s banking sector has been dealing with an overhang of non-performing assets even before the coronavirus pandemic came knocking on the door.

S&P Global has a grim outlook for the banking sector. The rating agency’s base case scenario sees banks in India dealing with a 13%-14% spike in non-performing loans from total loans in the current fiscal. “Moreover, the resolution of these bad-debt situations will likely unfold slowly, which means banks may also be saddled with a huge stock of bad loans next year,” the report said. An improvement of 100 basis points is expected in non-performing loans in fiscal year 2022. 

Bank’s, the report said, will not see a jump in loan growth in the current financial year owing to the risk-averse environment that the lenders are living in despite having adequate liquidity. S&P Global estimates that the government of India’s Rs 3 lakh crore emergency credit scheme for micro, small and midsize enterprises (MSMEs), will keep loan growth in low single digits. Although, the possibility of a nudge by the government to public sector lenders to lend more in an effort to revive credit growth to support the economy is not being ruled out. S&P Global is forecasting a rise in credit cost to the highs of 2018. “We anticipate credit costs will rise to about 3.7% of average loans in fiscal 2021. This cost should drop to 2% in fiscal year 2022, but this would still be above the 15-year average of 1.5%,” it said.

India’s largest public sector bank, State Bank of India, earlier this month announced that only one-fifth of its customers had availed the loan moratorium facility. The private sector banks, however, have a bigger share of customers opting in on the moratorium. Private-sector banks, including Axis Bank, ICICI Bank, and HDFC Bank, have declared that 20%-30% of their loans books were affected by the moratorium. With the Reserve Bank of India (RBI) asking banks to make a provision of 10% of overdue loans covered by the moratorium, the move might push the risk-averse lenders to provision even higher. S&P global has assumed that banks will create 55%-60% provisioning on their likely increases in bad debt in line with current NPL coverage ratios for the sector. This hike in provision will further hit the sector’s profitability.

Public sector banks, after getting capital from the government might be able to handle the credit losses, with their common equity Tier-1 ratio well above the regulatory requirement. However, without sufficient capital growth the banks may need another shot in the arms from the government, which S&P Global said is not unlikely. S&P added that non-bank lenders could be even worse hit. “These companies were already facing a trust deficit since the 2018 default of Infrastructure Leasing & Financial Services. Finance companies also face accentuated liquidity risks due to the high proportion of borrowers opting for loan moratorium,” said S&P Global Ratings credit analyst Geeta Chugh.