According to a new analysis from S&P Global Market Intelligence research, Indian banks' past efforts to improve their balance sheets will assist them to cushion the impact of asset quality as bad loans increased in the April-to-June quarter following a deadlier wave of the COVID-19 pandemic.
“Over the last year or so, banks have been taking steps to strengthen their balance sheets in preparation for the asset quality impact. These have been achieved by improving capital base, provisioning cover, and liquidity," said Krishnan Sitaraman, senior director at CRISIL, a division of S&P Global Inc. Gross non-performing assets (NPAs) increased in the June quarter, primarily in retail and small and medium-sized business portfolios for banks.
"This is because the epidemic and the lockdown measures have had a greater impact on these groups. The second wave of the pandemic has had a far greater health impact and geographical expansion than the first "Sitaraman remarked. The country's largest lender by assets, State Bank of India, reported total nonperforming loans of Rs. 1.36 lakh crore for the fiscal first quarter, which ended on 30 June up from Rs 1.28 lakh crore in the previous three months and Rs. 1.31 lakh crore in the same period of 2020. The second-largest private-sector lender, ICICI Bank, reported a rise in gross non-performing assets of Rs. 7231 crore in the first quarter, primarily due to its retail and business portfolio. In the first quarter, the state-run Bank of Baroda reported fresh slippages of Rs 5129 crore, compared to Rs. 2740 crores the year before.
According to a Jefferies research report dated Aug. 16, Indian banks had higher-than-expected slippages of more than 200 percent year over year, primarily due to retail and SMEs. According to Jefferies analysts, slippages were higher than expected due to new COVID-19 restrictions, which impacted collections. However, some banks began to recover in July, and normalcy may return in the fiscal second or third quarter.
During the second wave of the coronavirus, India's economy suffered a hit, with daily instances reaching over 400,000 in May. As the government ramped up vaccines, the number of cases has decreased in recent weeks. Nonetheless, the large number of COVID-19 cases and deaths is predicted to have had a greater economic impact in terms of employment losses and business closures. After the economy recovered from the initial wave of infections, most forbearance measures imposed last year, including a Supreme Court decision prohibiting banks from designating late loans as nonperforming assets, were repealed.
With a one-time debt restructuring facility and the Supreme Court's stay on NPA recognition no longer accessible, banks are finally seeing the full level of borrower hardship.
"In the absence of regulatory measures such as moratorium, the gross NPA formation due to the recent wave of COVID-19 is being up fronted in the first half of the current fiscal year for the system, including us," Sandeep Bakhshi, CEO of ICICI Bank, said during an earnings call on 24 July. Based on economic activity expectations, Bakhshi expects the bank's gross NPA additions to be lower in the second quarter and "decline more meaningfully in the second half of fiscal 2022". According to stress tests conducted by the Reserve Bank of India, bad loans held by all banks might increase to 9.80 percent by March 2022, up from 7.50 percent in the same month this year. In a "severe stress" scenario for key macroeconomic indicators, the bad loans ratio might grow to 11.22 percent by March 2022, according to the central bank's biannual Financial Stability Report released July 1. Many banks have set aside higher provisioning buffers and raised capital in the last one year or so. This should help them absorb the rising stress in their retail book.
Banks with lesser provisioning buffers and lower capitalization, on the other hand, may suffer a significant impact on their profitability and capital levels "Anand remarked. “This might be especially problematic for banks that have large underlying exposure to small business owners or unsecured retail goods, where the risk of default is higher.
Comments