Restructuring of loans could drive down slippages and credit provisions for banks: ICRA

Rating agency ICRA on Wednesday said restructuring of loans could drive down slippages and credit provisions for banks. The rating firm has reduced its estimate on fresh slippages to 3.1-3.7% of loan book by March 2021, as against 5-5.5% projected in June 2020.

ICRA also expects credit provisions to decline by 70 basis points (bps) to 2.5% till March 2021, compared to 3.2% in March 2020. It had estimated that 5-8% of loans were likely to be restructured according to the Reserve Bank of India guidelines on August 6. The central bank had earlier allowed restructuring of personal and corporate loans impacted due to Covid-19.

“While higher restructuring could lead to lower non-performing asset (NPAs) levels, lower restructuring could lead to NPAs at a later stage,” Karthik Srinivasan, senior vice-president, financial sector ratings, ICRA, said. The agency expects gross NPAs of banks to touch 10.6% by March 2021, compared to 8.6% in March 2020.

According to the rating agency, gross NPAs of the public sector banks will remain at 11.1-11.4% by March 2021, as against 10.7% in March 2020. Similarly, for private sector banks, gross NPAs may rise to 5.7-6.4% by March 2021, compared to 4.2% in March 2020.

“The actual stress to start reflecting in little way in third quarter (Q3) of 2021 results and more pronounced by first and second quarter of 2022 earnings,” Srinivasan said.

The rating agency expects a better scenario for banks in financial year 2022. The public sector banks could break even and private banks will be able to witness improvement in profitability during 2021-22, according to ICRA.