MUMBAI: The threat of third wave of COVID-19 poses high risks to banks asset quality, especially the restructured loan book, according to a report by domestic rating agency ICRA. Besides bad loans, lenders are likely to see challenges on profitability and solvency fronts due to the disruption caused by the Omicron variant of coronavirus, the agency said.
It also sees a 15-20-basis point uptick in restructuring requests from the borrowers. The agency's Vice-President (Financial Sector Ratings) Anil Gupta said, "With the increased spread of the new COVID-19 variant, i.e.Omicron, there is a high possibility of the occurrence of a third wave."
He added that a third wave poses a high risk to the performance of the borrowers that were impacted by the previous waves and hence poses a risk to the improving trend of asset quality, profitability and solvency.
Gupta also said banks restructured most of the loans with a moratorium of up to 12 months. "Hence, the restructured book is likely to start exiting the moratorium from Q4 FY2022 and Q1 FY2023," he said. During the two waves of the pandemic, the Reserve Bank of India (RBI) announced Resolution Framework 1.0 and 2.0 to provide relief to the borrowers and banks.
With incremental restructuring under COVID 2.0 scheme, the overall standard restructured loan book for banks increased to 2.9 per cent of standard advances as on September 30, 2021, (two per cent as on June 30, 2021), the report said.
Most of this restructuring includes borrowers impacted by COVID 1.0 and 2.0. The agency said the restructuring under Covid 1.0 scheme is estimated at 34 per cent (or Rs 1 lakh crore) of the total standard restructured loan book of Rs 2.85 lakh crore for banks as on September 30, 2021.
And, under COVID 2.0, it is estimated to be at 42 per cent or Rs 1.2 lakh crore. The balance comprised micro, small and medium enterprises (MSMEs) and other restructuring, it said.
The report added that banks have implemented about 83 per cent of the total requests received under COVID 2.0, leading to an overall restructuring of Rs 1.2 lakh crore of loans till September 30, 2021. "As the restructuring requests can be implemented till December 31, 2021, (under COVID 2.0 scheme), incremental restructuring could increase by 15-20 bps from the current levels," the agency said.
Gupta added that the third wave could revive the demand for the restructuring of loans, including those that were already restructured. "In such a case, visibility on the performance of the restructured loan book, which was earlier expected in FY2023, may now be expected in FY2024 as the moratorium on the existing restructured loans could be extended," he said.
As per ICRA's estimates, 60 per cent of the total restructuring of Rs 1 lakh crore under Covid 1.0 was accounted for by corporates and the balance (or Rs 0.4 lakh crore) by the retail and MSME segments. "Hence, the restructuring under COVID 2.0, which was available for retail and MSME borrowers, stood at 3x of the restructuring under COVID 1.0," it said.
The report said the restructuring also led to the upgradation of accounts, which would have slipped earlier. This, coupled with the large recovery from Dewan Housing Finance Ltd (DHFL) in Q2 FY2022, led to the highest recoveries and upgrades for banks during the past three years.
As a result, despite the elevated gross slippage rate of 3.2 per cent in Q2 FY2022 (3.5 per cent in H1 FY2022 and 2.7 per cent in FY2021), the gross and net non-performing advances (NPAs) remained on a declining trend, it said.