MUMBAI: Stressed Indian bank assets will remain up at 11-12% in fiscal 2022, S&P Global Ratings announced on Wednesday. The agency expects non-performing loans plus restructured assets to increase from 8.7% last year to 11.5% in the current fiscal year. It also expects banks’ performance to suffer in the first half of the fiscal year due to the impact of the second wave.
“The second wave has an initial weakness in asset quality. Financial institutions are facing a tense first half with poor collections and low payouts,” said Deepali Seth Chhabria, credit analyst with S&P Global Ratings.
According to S&P, while incremental non-performing loans will remain elevated in the current fiscal year, resolutions should tighten, which will limit the increase in bad debts. The establishment of a bad bank and the government’s emergency loan guarantee program will ease the stress in the industry.
Sectors such as tourism and recreation, commercial real estate, and unsecured retail loans can all contribute to higher non-performing loans. However, the banking system’s exposure to many of these segments is moderate and likely to have a limited impact, it said.
S&P also said the government’s decision to expand the guarantee system on new loans to microfinance borrowers will increase liquidity, but some of the affected borrowers may struggle to repay their accumulated debts. The global rating agency therefore expects that the restructuring requests from borrowers will increase under the second restructuring scheme, which could reduce the recognition of non-performing loans.
However, S&P added that banks are better prepared than before to recover from the second wave. While many raised equity last year, few like IDBI Bank, Indian Bank raised equity this year. Non-banks can see a bigger impact.
The global rating agency expects the return on average assets in FY 2022 to remain similar to last year at 0.7%, but an improvement from 0.1% in FY 2020. Banks already have COVID-related provisions of 0 , 5 to 1.5% formed. of credit. In addition, the central bank has allowed banks to use all other variable and countercyclical provisions to address bad loans, it said.
In January, the Reserve Bank of India’s financial stability report forecast that commercial banks’ gross assets could rise from 7.5% baseline to 13.5% by September. If the macroeconomic environment worsens, the rate could rise to 14.8% in the severe stress scenario, said the central bank.
Subscribe to something Mint newsletter
* Please enter a valid email
* Thank you for subscribing to our newsletter.
Never miss a story again! Stay connected and informed with Mint. Download our app now !!