The banking sector had a litany of bad news today with two rating agencies warning about the mounting bad loans problem and the poor capital position and placing the sector on a negative outlook.
While domestic agency Crisil has forecast a spike in NPAs to 10.5 per cent by March and the system level stress at Rs 11.5 trillion, or 14 per cent, its global rival Fitch placed the banking sector under a negative outlook.
Crisil said since banks have only recognised two- thirds of their stressed loans as NPAs, "bad loan ratio is set to rise by 1 percentage point to 10.5 per cent by March 2018 up from 9.5 per cent in March 2017, which included only two- thirds of the overall stressed assets."
The agency estimates total amount of stressed loans, which includes NPAs and standard assets that are under pressure currently and could deteriorate into NPAs, to be at Rs 11.5 trillion, or 14 per cent of the system.
Citing vulnerable capital position due to high bad loans and poor loan growth, Fitch said, "The negative outlook is based on our assessment that the banking sector's weak core capitalisation continues to pose downside risks to standalone credit profiles amid expectations of continued poor loan growth, weak earnings, volatile asset quality and elevated credit costs."
It warned asset-quality outlook will remain challenging in the next 12 months due to incipient stress in the power sector and concerns about farm loan waivers and SMEs and pointed out that banks will need USD 65 billion in additional capital to meet Basel III requirements by March 2019 with state banks alone needing over 90 per cent of this.
"The government will have to pump in significantly more even on a bare minimum basis if it is to address the system-related risks of a huge NPAs, weak provision cover and poor loan growth," Fitch report said.
It, however, added that private-sector banks are well- placed although despite being under pressure due to deterioration in asset quality.
Crisil said assets under pressure comprise the not- yet recognised bad loans which are recognised as NPAs in one bank, but not in others, restructured standard accounts, and stressed assets structured under schemes such as the strategic debt restructuring, the 5/25 and the S4A.
"Gross NPAs will be 10.5 per cent of advances by March 2018, up from 9.5 per cent in March 2017," Crisil said, adding infrastructure, power, engineering, and construction sectors contribute bulk of the stressed assets.
It called for faster resolution of stressed accounts through the Insolvency and Bankruptcy Code and various structuring schemes.
"With the majority of stressed assets now recognised as NPAs, rest of the corporate loan portfolio of banks can be expected to perform better over the medium-term," Crisil said, adding "in the past couple of years, recoveries have been poor and the bulk of the reduction in gross NPAs has been because of higher write-offs."
Fitch said gross NPA ratio touched 9.7 per cent in FY17--a jump of close to 200 basis points in comparison with the 50 basis points increase in the stressed asset ratio of 12 per cent. The report said satisfactory resolution of large stressed loans underway under the RBI's oversight and can have a positive effect on NPAs.
Provisions are likely to rise in the interim as NPA cover is moderate at 40-50 per cent, it noted, and said it expects banks' earnings to remain subdued in the near-term.
"Banks will find it difficult to manage elevated credit cost pressures as income generation will suffer due to the income loss from NPAs and the weak growth outlook."
Loan growth, that slumped to 4.4 per cent in FY 17 -- lowest in several decades -- is expected to remain subdued for the foreseeable near-term, Fitch said.
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