Due to stress emerging from the real estate, micro, small and medium enterprises (MSMEs), the non-banking space and also on the retail front, the gross slippage of the banks in FY20 will be at an elevated level at around Rs 2.8 trillion to Rs 3.2 trillion, rating agency ICRA said in its outlook for banking sector.
“Gross slippages are estimated to remain elevated at 3.2-3.6 per cent of standard advances during FY20 as compared to 3.9 per cent during FY19”, said ICRA.
In Q1FY20, fresh gross slippages stood at Rs 85,643 crore as compared to Rs 77,784 crore in Q4FY19 and Rs 94,756 crore in Q1FY19. The rise in slippages in Q1FY20 from last quarter of FY19 was driven by increased slippages in the MSME sector and the seasonal spike witnessed in agricultural segment during Q1.
The rating agency also forecasted weak return on assets (RoA) for public sector banks (PSBs) in FY20 as most of their operating profits will be consumed in provisioning for bad assets, which will leave these PSBs with poor profitability and a meager return on equity (RoE) of less than 1 per cent.
On the other hand, the private banks, due to higher credit cost in FY20, will see muted RoE at 9-10 per cent.
Moreover, after the merger of banks announced by government and the recapitalisation of PSBs, ICRA says, “The net Non Performing Assets (NPAs) levels are expected to be below 6 per cent by March 2020 for all the banks, while keeping their capital levels above the regulatory requirements”.
As far as credit growth is concerned, ICRA says outstanding credit between March 2019 and August 2019 decelerated with non-food bank credit declining to Rs 96.2 trillion as of August 16, 2019 from Rs 97.25 trillion as of March 29, 2019. ICRA also said that credit growth will be around 8-10 per cent for PSBs and 12-16 per cent for private banks with overall sector growth of 9.5-12.2 per cent during FY20.
“The de-growth in bank credit could be because of seasonally weak credit demand during the first half of the financial year or; possibly because of increased credit risk aversion of banks given some of the recent defaults by large borrowers”, ICRA said.