The headline pro forma gross non-performing assets (NPAs) and net NPAs reported by banks do not reflect the underlying stress on the asset quality of banks as the quantum of loans in the overdue categories has increased post the moratorium period and this will lead to a rise in non-performing assets of the banks.
Rating agency Icra expects asset quality pressure for banks to resurface after the impact of the relief measures by the government and the regulator wanes off. It has estimated that the gross NPAs (excluding write-offs) will rise to 9.6-9.7 per cent by March 31, 2021 and 9.9-10.2 per cent by March 31, 2022 from 8.6 per cent as of March 31, 2020.
Including the pro forma gross NPAs of Rs 1.3 trillion (1.1 per cent of gross advances) and net NPAs of Rs 1 trillion (1 per cent of Net advances), the gross NPA and net NPA of the banks stood at 8.3 per cent and 2.7 per cent as on December 31, 2020. This is lower compared to the numbers to 8.6 per cent and 3 per cent gross NPA and net NPA reported by the banking sector respectively as of March 31, 2020.
According to Anil Gupta, Sector Head – Financial Sector Ratings, Icra Ratings, While the headline asset quality and restructuring numbers are encouraging, these don’t reflect the underlying stress on the asset quality of banks.
“The level of loans in overdue categories has increased after upliftment of moratorium and the impact on asset quality will be spread over FY21 and FY22 as various interventions and relief measures have prevented a large one-time hit on profitability and capital of banks”, he said.
Based on the restructuring guidance given by various banks, the overall volume of restructured advances is estimated at 1.3-1.5 per cent of the advances, much lower than what analysts and rating agencies had initially estimated.
In a report rating agency Icra has highlighted that despite the impact of Covid-19 pandemic on debt servicing ability of borrowers, the gross fresh slippages for banks stood much lower at Rs 1.8 trillion (2.7 per cent of advances on annualised basis) during 9MFY21 as compared to Rs 3.6 trillion (4.1 per cent) during FY2020.
And, this has mainly been driven by the various relief measures such as a moratorium on loan repayment, a standstill on asset classification, and liquidity extended to borrowers under the guaranteed emergency credit line.
While the gross NPAs are expected to rise in the coming quarters, the net NPAs is expected to be relatively lower because of significant provisions made by banks on their legacy NPAs.
“Even on a pro forma basis, the net NPAs were lower as on December 31, 2020 as compared to March 31, 2020. While the net NPAs are expected to rise marginally to 3.0-3.1 per cent by March 31, 2021, it will decline to 2.3-2.5 per cent by March 31, 2022”, said Icra.