Ind-Ra cuts banking outlook to negative on rising NPA, credit cost

As per Ind-Ra's bear case, the spike in stressed assets due to pandemic is expected to double the credit costs for banking system

India Ratings and Research (Ind-Ra) on Friday revised its outlook on the banking sector to “negative” from “stable” for the second half of the financial year 2020-21 (October 2020-March 2021, or H2FY21) on an expected spike in stressed assets and higher credit costs. Earnings, it said, may take a hit on account of interest reversals and lower fee income.
 

The domestic rating agency said growth prospects for the sector are muted in the wake of the measures taken to contain the spread of the Covid-19 pandemic. Additionally, capital buffers for most public sector banks (PSBs) remain modest.
 

According to Ind-Ra’s bear case, the pandemic-led spike in stressed assets is expected to double the credit costs for the banking system compared to the estimated pre-Covid-19 levels for FY21.
 

The modest capital buffers of PSBs are expected to deplete further in FY21 owing to provisioning requirements. Also, pre-Covid profitability expectations for FY21 would be belied and most banks are likely to report net losses, it said.

 

State-owned banks may also need to continue to build up their provision cover in FY22 for restructured assets as some of these could turn NPA in FY23. PSBs could require Rs 35,000-55,000 cr in H2FY21 for Tier-1 ratio of 10 per cent, it said. Covid-19 or contingent provisions are much lower for PSBs than that for private banks.
 

The rating agency maintained its stable outlook for private banks and said they are better placed to withstand the challenges presented by the pandemic. Most large banks have strengthened their capital buffers, built contingent provisions and have been proactive in managing the loan portfolio.
 

The system’s credit growth could remain anaemic, and short-term financial performance could deteriorate modestly. It sees the large banks benefitting from credit migration.
 

As opportunities arise, these banks are in a position to gain substantial franchise growth in the medium term, given that they have also added to their capital buffers over the past few months, it added.
 

Loan restructuring would provide flexibility to pursue temporary relief measures. Under the new restructuring framework, lenders would be able to handhold those borrowers who have been temporarily impacted by Covid-19 but are otherwise viable.

Certain stressed assets, though not at the risk of an immediate slippage, could also be restructured.
 

According to Ind-Ra’s estimates, total restructuring would be to the tune of 7.7 per cent (Rs 8.4 trillion) of the bank credit at end-March 2020.