Moratorium gives relief not only to borrowers, but to banks too; helps SCBs cut NPAs in Q1

The loan moratorium provided during the lockdown months not only gave relief to borrowers; it also helped banks to cut gross non-performing assets. Had the moratorium not been there, the GNPAs would be likely higher, given the impact of the coronavirus pandemic, said a report by Care Ratings. The increase in the interest income can be observed in Q1 FY21, as despite the moratorium, the interest on the loans has accrued and therefore considered in the calculation of interest income for the quarter, the report added. The interest income growth has also been attributed to the decrease in gross NPAs from Rs 9.2 lakh crores in Q1 FY20 to Rs 8.4 lakh crores in Q1 FY21.

The GNPA ratio of the banks has significantly reduced by the end of the first quarter, due to recoveries and higher write-offs. However, as per RBI’s macro stress tests for credit risk, the GNPA ratio of SCBs is expected to increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021. Further, it may expand to 14.7 per cent under very severe stress conditions. 

Low credit growth

Despite the availability of ample liquidity in the banking system, the credit growth has remained low and the rating agency suggested that the overall bank credit is expected to remain slower in the near term as the SCBs are cherry-picking their credit portfolios with caution and the economic activities are subdued. It also cautioned that if the entities that had availed moratorium are not able to run their business once the lockdown is lifted completely, it will result in non-payment of the loan, further leading to an increase in the GNPAs in the coming quarters.

However, the Reserve Bank of India has permitted a one-time restructuring of loans across corporate loans, MSME loans, and personal loans, which would allow the banks to take appropriate actions after understanding ground realities post moratorium, the opening of the economy, and the impact of the pandemic. Meanwhile, among PSU banks, the State Bank of India, which accounts for the highest share at 20 per cent of the GNPAs of SCBs in Q1FY21 reported the highest asset quality improvement, with a decline in GNPA ratio to 5.4 per cent in June 2030 against 7.5 per cent in the same period last year.