Bad loans to soar, affect banks’ profitability: ICRA

For FY20, NPAs are pegged at 8.6% and considering the unexpected rise in bad loans in FY21, capital needs of banks shot up from Icra’s earlier estimate of Rs 10,000-20,000 crore.

HYDERABAD:  Bad loans of Indian banks are expected to rise to 11.3-11.6% this fiscal and Rs 45,000-82,500 crore capital might be required to overcome the rising asset quality pressures, according to Icra Ratings. It added banks’ profitability could be under stress, while the overall credit growth is projected at a dismal 3-4% in FY21.

For FY20, NPAs are pegged at 8.6% and considering the unexpected rise in bad loans in FY21, capital needs of banks shot up from Icra’s earlier estimate of Rs 10,000-20,000 crore. “The uncertainty on the asset quality of banks remains high with almost 30-40% of loan book across various banks under moratorium announced by the Reserve bank of India (RBI),” ICRA said. 

Besides state-run banks, private lenders, too, need and are expected to raise approximately Rs 25,000-48,300 crore capital during FY21-FY22 to maintain higher capital ratios and mitigate rising asset quality stress.
Borrowers’ ability to repay loans has been severely hit due to the lockdown and the pace of economic revival will determine the final impact on asset quality. 

Subsequently, Icra notes that even if 10-20% of the borrowers default, the slippage rate for banks could rise to 3-8% of loans. “The RBI moratorium to borrowers was extended by another three months till August 31, 2020, and we expect the asset quality stress is likely to reflect only in Q3 FY2021 and Q4 FY2021 results,” said Anil Gupta, sector head - financial sector ratings, ICRA Ratings, in the statement.
He added credit provisions will continue to exceed the operating profits for the public sector banks (PSBs) during FY2021, translating in a sixth consecutive year of loss.

Private banks, too, will be hit
Icra expects the profitability of private sector banks to moderate with return on equity falling to 3.5-5.1% in FY21 against 10-12% projected earlier

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