NEW DELHI: The banking sector only had a few months experience with the pandemic when it last tried to forecast how bad things would get. The earnings release for the third quarter (October-December, 2020) is likely to be a true performance test for whether the Indian economy is recovering, with analysts expecting that this will be the first quarter of positive GDP growth since the outbreak of Covid-19.
In the previous two quarters, the two key issues surrounding the quality of bank earnings were bad loan recognition and provisions. The loan moratorium prevented true asset classification; banks made higher contingent provisions, and there was limited visibility on the loan book status. Experts say that stress recognition, provisions, and the recovery cycle will dominate conversations this quarter.
“Banks have been vigilant in approving restructuring and how much stress (after a couple of quarters of non-recognition) flows as slippages will be key. We expect 4-7 per cent slippage in Q3FY21,” said analysts from ICICI Securities. Currently, the Supreme Court’s order restrains banks from tagging standard assets as non-performing loans (NPL).
But banks will disclose pro forma NPLs and make upfront specific provisioning on this incremental stress. Most private banks and the State Bank of India have built up sufficient provisions and capital buffers to cope with the impending stress. “This coupled with provisioning on the restructured pool will keep credit cost elevated at 2-4 per cent,” the analysts added. Total restructuring requests are also much lower at Rs 2 lakh crore compared to the estimates of Rs 8 lakh crore.
In terms of credit growth, banks may see a 3-4 per cent increase sequentially translating to 7-9 per cent growth over the previous year. According to the latest available data (December 18, 2020) for the banking system, loan growth has remained sluggish at 5-7 per cent year-on-year since the onset of Covid, compared to 8-10 per cent a year ago. There is also an element of capitalization of interest reflecting in overall loan growth numbers. In its business update, private sector HDFC Bank said it has witnessed 19 per cent loan growth in Q3 FY21.
RBI forms new AAC
The RBI has appointed a 6-member academic advisory council to support its college of supervisors. It will be chaired by former RBI deputy governor NS Viswanathan. Former RBI ED R N Mishra will be its administrative head and non member director.