<\/p>\n
Deepali Seth Chhabria, credit analyst, said that the agency expects a fresh high in NPAs to reach 13-14% of the total loans come March 2021. \u201cMoreover, the resolution of these bad-debt situations will likely unfold slowly, which means banks may also be saddled with a huge stock of bad loans<\/a> next year,” S&P sees a recovery by 100bps in NPAs only by March 2022.<\/p>\n The report stated that the Covid hit came at a time when the Indian banking system<\/a> was seen improving after \u201cyears of deterioration\u201d and now this outbreak has largely \u201cderailed that rehabilitation process\u201d. The report said, \u201cIndian banking system has improved over the past 18 months, helped by higher write-offs, slower accretion of bad loans, and resolution of some big cases under the new bankruptcy law.”<\/p>\n For this fiscal, the credit growth will remain weak with loan growth refrained to single digits due to \u201ctepid demand\u201d and banks turning risk-averse while sitting on liquidity piles. Additional risk might be posed by the government pushing public sector banks<\/a> (PSUs) to help India weather the pandemic.<\/p>\n Standard & Poor also expects the slippages to shoot up, \u201cwe estimate the banking sector’s bad loan accretion will be 6% of existing loans in the current fiscal year\u201d which is quite higher compared to Asian peers. The slippages levels however can be reduced in case of RBI<\/a> allowing for restructuring of loans, but that would only sustain this fiscal as it would just \u201cdefer NPL recognition\u201d, the report stated.<\/p>\n Outlining particular sectors as the possible source of bad loans ahead, it stated that \u201cservice sectors such as airlines, hotels, malls, multiplexes, restaurants, and retail may see a significant loss of revenue and profits due to the outbreak.\u201d With high leveraged sectors like real estate developers also remaining in the red zone.<\/p>\n Another hit to banks will be due to their exposure to finance company<\/a> sector. \u201cAs of March 27, 2020, finance companies made up about 8.8% of all bank loans\u201d and in the current crisis these companies face heightened liquidity risks with larger proportion of their customers availing the moratorium options and insufficient cash inflows.<\/p>\n With a rise in bad loans, \u201ccredit costs will likely increase again in the current fiscal year and surpass the highs seen in fiscal 2018\u201d, the rating agency expects credit cost to rise to 3.7% of average loans in FY21<\/a>, further lowering down by 2% in FY22<\/a>. \u201cThis would still be above the 15-year average of 1.5%\u201d.<\/p>\n As a ripple effect, with surge in credit cost, profitability will lower, leading the sector to report a \u201closs of 0.3% of average assets\u201d for the current year, with public banks taking a larger share of the weight of loss compared to their private peers.<\/p>\n<\/div>\n