Bank NPAs may rise to double digits this year; these factors likely to weigh on bad loans

The disruptions led by the coronavirus pandemic has further deteriorated the health of the Indian banking industry, which was already reeling under severe stress in the previous years. India’s NPA ratio is one of the highest among comparable countries and further, it is expected to reach 11-11.5% by the end of the current fiscal year 2020-21, said a report by Care Ratings. The FY21 GNPA numbers would move significantly ahead from the current 8.5 per cent level, but would be lower due to the one-time restructuring scheme, the report added. However, it is estimated that the additions to the GNPAs would primarily take place from SMA 1 and SMA 2 corporate loans under moratorium and not eligible for restructuring. 

Lower-rated corporates not eligible for the restructuring scheme already stressed companies which could face liquidity constraints in a challenging economy, and banking exposure to unsecured personal loans, are also the reasons for higher bank NPAs this fiscal. The Reserve Bank has permitted a one-time restructuring of loans across three segments – corporate loans, MSME loans, and personal loans. 

However, before the loan restructuring was announced by RBI, a Finacial Stability Report released in the month of July showed that the gross NPA ratio of all SCBs may increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021 under the baseline scenario. It had added if the macroeconomic environment worsens, the ratio may further escalate to 14.7 per cent under the very severely stressed scenario.

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On the projection of a skyrocketing NPAs, RBI Governor Shaktikanta Das had said that the country’s financial system is sound but lenders should desist from extreme risk aversion during the Covid-19 pandemic and beyond. Shaktikanta Das had added that the top priority right now for banks and financial intermediaries should be for augmenting capital levels and improve resilience. He had also underlined that financial sector stability is a prerequisite for giving confidence to businesses, investors, and consumers, thus, banks have to remain extremely watchful and focused.