NEW DELHI: As the second wave of Covid-led disruptions across sectors dent the repayment capacity of borrowers, the Reserve Bank of India (RBI) has warned that bad loans are set to see a steep hike during this financial year.
Unlike the last year, however, the central bank expects the banks’ stress level to be less - helped by restructuring, write-offs and regulatory forbearance including a loan moratorium - and all 46 lenders are expected to have sufficient capital to weather this stress even under a worst situation.
According to the RBI's Financial Stability Report (FSR) released Thursday, the gross non-performing asset (NPA) ratio for the banking sector could rise to 9.8 per cent by March 2022 under a baseline, as compared with 7.48 per cent in March 2021.
But if the macroeconomic environment worsens, and under the very stressed scenario, bad loans could be as high as 11.2 per cent, while banks may see capital adequacy ratios at 10.73 per cent (still higher than the minimum regulatory requirement of 9 per cent) by March 2022.
To be sure, this is only a first estimate with revisions expected during the course of the fiscal year. The current stress tests assume GDP growth at 9.5 per cent in FY22 and a 5.1 per cent average retail inflation.
By RBI's own admission, the stress tests do not amount to forecast. "They are indicative of the possible economic impairment latent in banks’ portfolios, with implications for capital planning," it said.
The increase in bad loans predicted by stress tests last year came in at 12.5 per cent as against the actual 7.5 per cent. Ditto for the last four years.
Then, in January, the RBI had projected that GNPAs would be around 13.5 per cent under the baseline scenario in September 2021, and 14.8 per cent under a severe stress situation.
However, the central bank explained that the difference between the January estimate and the current report arrived at after an estimation of bad loans based on past slippage ratio and GNPA ratio as there was a standstill order against loans being classified as NPAs.
In March 2021, the Supreme Court lifted the bar on loans being classified as NPAs and the actual data on asset quality became available, enabling the central bank to do stress tests based on the regular methodology, the report stated.
"The dent on balance sheets and performance of financial institutions in India has been much less than what was projected earlier, although a clearer picture will emerge as the effects of regulatory reliefs fully work their way through. Yet, capital and liquidity buffers are reasonably resilient to withstand future shocks, as the stress tests presented in this report demonstrate," said RBI Governor Shaktikanta Das.
"It is important to note in this context that while the recovery is underway, new risks have emerged in the horizon and these include the still nascent and mending state of the upturn vulnerable to shocks and future waves of the pandemic, international commodity prices and inflationary pressures, global spillovers amid high uncertainty, and rising incidence of data breaches and cyber-attacks," Das added.
Subdued credit growth
Meanwhile, the RBI expects the credit growth may remain sluggish in FY22 amid limited capital expenditure plans and lower discretionary spending compared to pre-pandemic levels. The gross bank credit growth stood at 6 per cent in May 2021, despite a low base of last year, aided by the credit guarantee schemes from the Centre.
“The environment for bank credit remains lacklustre in the midst of the pandemic, with credit supply muted by persisting risk aversion and subdued loan demand. Subdued credit growth in a low interest rate scenario could impact net interest income levels adversely,” the central bank noted. While demand for consumer credit has dampened, deposit growth maintained its upward trajectory, reflecting continued preference for precautionary savings.
Analysts, too, expect the loan growth for FY22 to remain in single or low double digits. "We expect the credit growth to come in low double-digits. Retail loan segment is expected to do well as compared with the industry and service segments. However, the downside risks including concerns over a third wave may impact both the industrial as well as service segments," noted Care Ratings' analysts.
ICICI Securities expect the industry growth at 8-10 per cent for FY22.
A recent report from SBI's research wing, Ecowrap, also pointed out that credit growth this year is likely to languish near FY21 levels (5.56 per cent, a 59-year-low), thanks to corporates rapidly deleveraging by repaying high cost loans through funds raised via bond issuances.
"Corporate willingness for new investments also remains tepid as the economy is still recovering from the devastating second wave," according to Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.
Significant stress among MSME, retail
The RBI has cautioned banks on the risks arising out of loans to small businesses and retail.
“While banks’ exposures to better rated large borrowers are declining, there are incipient signs of stress in the micro, small and medium enterprises (MSMEs) and retail segments. Despite the restructuring, stress in the MSME portfolio of public sector banks (PSBs) remains high,” the report said.
At the end of March 2021, for PSBs, 15.9 per cent of loans less than Rs. 25 crore to the MSME sector had turned bad.
This was against a NPA ratio of 13.1 per cent at the end of December 2020 and 18.2 per cent at the end of March 2020.
As for private lenders, the NPA ratio stood at 3.6 per cent as of March 2021 against 2 per cent in December 2020 and 4.3 per cent in March.
The RBI data showed that the industry has cumulatively restructured loans worth Rs. 36,000 crore under the August 2020 Covid-19 loan restructuring scheme.
State-owned lenders held the lions share at Rs. 24,816 crore while private banks have recast MSME loans worth Rs. 11,027 crore.
Still, large borrowers make up the lion’s share of a bank’s bad debt even now.
The share of large borrowers in the aggregate loan portfolio of banks stood at 52.7 per cent in March 2021, but they accounted for 77.9 per cent of the total GNPA, up sharply from 73.5 per cent in September 2020.