NPA May Rise To 10% By March 2021, Bank Credit Growth To Moderate To 6.5-7.0% During FY2020 From 13.3% In FY2019: ICRA Report

According to the statement from the agency, it is expected that net NPA may decline from 2.4 per cent to 2.6 percent by March of 2022.

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Mumbai: Indian Credit Rating Agency (ICRA) which is an Indian independent and professional investment information and credit rating agency, in its annual report said that banks' gross non-performing assets (NPAs) and net NPAs are expected to rise to 10.1-10.6per cent and 3.1-3.2per cent, respectively by March 2021.

According to the statement from the agency, it is expected that net NPA may decline from 2.4 per cent to 2.6 percent by March of 2022.

“As moratorium on loan repayments is over and though we await the Honorable Supreme Court directive on asset classification, the GNPAs and NNPAs for banks are likely to rise in the near term to 10.1-10.6per cent and 3.1-3.2per cent, respectively by March 2021 from 7.9per cent and 2.2per cent, respectively as of September 2020," the rating agency said in its report.

However, the net NPAs and credit provisions will subsequently trend lower in 2021-22 as banks have reported strong collections on their loan portfolio with most of them reporting collections of over 90per cent.

The report mentioned that the loan restructuring requests are much lower than previously estimated, supported by sharper than expected improvement in economic activities as well as liquidity support through the government's emergency credit line guarantee scheme.

According to the report, the agency has revised its loan restructuring estimate downwards to 2.5-4.5per cent of advances as against 5-8per cent estimated earlier.

"With expectations of sustained collections and lower restructuring, the asset quality is expected to improve further with net NPA declining to 2.4-2.6per cent by March 2022. This will lead to lower credit provisions and better profitability in FY2022," ICRA's sector head (financial sector ratings) Anil Gupta said.

The agency said the credit provisions are estimated to decline to 1.8-2.4per cent of advances during 2021-22 from an estimate of 2.2-3.1per cent in the ongoing fiscal and 3.1per cent in 2019-20, which will lead to an improvement in return on equity (RoE) for banks. It expects public sector banks to break-even after six consecutive years (FY 2016- FY 2021) of losses and generates RoE of 0.0-5.4per cent for FY2022 ( -2.3per cent/ 3.7per cent for FY2021 and -6.5per cent for FY2020).

The report further noted that RoE for private banks is also estimated to improve to 9.5-10.5per cent in FY2022 (2-7.5per cent in FY2021 and 6.5per cent for FY2020).

“The capital position for large private banks is strong and can withstand the stress case scenario for asset quality after these banks raised Rs 54,400 crore of capital during the nine months of FY2021," Gupta said.

With large capital raise and expectations of improved profitability, banks are also well placed to exercise call options on their Rs 26,000 crore of AT-I bonds falling due in next fiscal and FY2023 without a significant impact on their capital, the report said.

“Public sector banks will need to raise additional capital of up to Rs 43,000 crore next year as they have call options falling due on the AT-I bonds totaling Rs 23,300 crore during 2021-22,” the report said

The agency further said low-interest rates, improved business volumes, better job prospects, and income levels could also stimulate credit demand next year.

This coupled with better competitive positioning of banks vis-a-vis other lenders driven by a steep decline in cost of deposits could improve bank credit growth to 6-7per cent in the next fiscal from an estimated 3.9-5.2per cent in 2020-21 and 6.1per cent in 2019-20, it added.