Banks asset quality may take further hit due to Covid-19: Report

The outbreak of COVID-19 and continued slowdown in the economy are likely to have an impact on banks asset quality and may trigger a surge in gross non-performing assets (GNPA) ratio to 9.6 to 9.9 per cent by the second or third quarter of the next fiscal, says a report.

The global pandemic has stalled the economic activity which is going to severely impact sectors such transport, travel and tourism, aviation, among others.

The Reserve Bank and the government may announce a regulatory forbearance or an interest subvention scheme on report by Care Ratings loans to help banks deal with the NPA stress, according to a report it said.

"Considering that there has been no substantial improvement in the economy, ageing provisions and coupled with the recent outbreak of 'COVID-19', the banking sector might witness an adverse impact on credit delivery and asset quality leading to pressure on capital adequacy, the rating agency's senior director, Sanjay Agarwal, said in the report.

The GNPA ratio of banks is likely to be in the range of 9.6-9.9 per cent by the second or third quarter of FY21 from 9.3 per cent as of December 2019, given the exposures to certain stressed sectors, moderation in the bank credit growth and muted demand scenario, he said.

The rating agency said as there is a lockdown imposed within India and the world, both domestic consumption as well as export-oriented industries could be affected due to muted demand.

To cushion the economic fallout of Covid-19, systemic liquidity and cheaper funds are being made available, but these will not help resolve the worsening health crisis and would also not address the issue of subdued demand, it said.

"The RBI along with the central government might undertake measures such as interest rate subvention on retail loans (funded by the central government) and regulatory forbearance on loan classification or one-time extension of the 90-day NPA recognition period to reduce the stress of NPAs on the banking system and reduce the associated additional capital requirements, the rating agency said.

It further said a prolonged disruption could impact the ability of companies especially MSMEs from multiple sectors to service their financial obligations leading to elevated NPA levels.

Additionally, employees who have received pay cuts and self-employed people might be affected and their payment behaviour, especially on personal loans as well as large ticket loans might weaken, the report said.

Provisions of banks are also likely to rise in the coming quarters on account of recognition of stressed assets due to exposure to some stressed groups in the NBFC/HFC segment along with other corporates that have undergone structural changes due to the policy and regulatory measures.

Gross NPAs of SCBs declined by 2.9 per cent in the third quarter of the present fiscal helped by the reduction in the slippages of the state-run banks and the loan write offs.

As of December 31, 2019, the PSBs registered a contraction in their gross NPA amount by 7.9 per cent while the gross NPA amount of private sector bank grew by 17.6 per cent as of December 31, 2019.