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Monday, November 30, 2020

Banks weather pandemic impact as moratorium helps to report lower NPAs

Banks have been permitted by the RBI to undertake a one-time restructuring exercise of loans affected by the pandemic, which will provide relief in terms of bad loan recognition and provisioning.

Written by George Mathew | Mumbai | November 12, 2020 2:24:57 am
Although as a percentage of advances, there has been improvement in gross NPA ratio in September, the RBI has warned against a rise in bad loans in coming months.

The banking sector has reported lower non-performing assets (NPAs) during the quarter ended September 2020, as the moratorium announced by the Reserve Bank of India (RBI) aided banks to show a decline in stressed assets.

Despite the lockdown, layoffs and closure of many units in the wake of the Covid-19 pandemic, gross NPAs of 31 banks declined by Rs 43,848 crore to Rs 7,91,088 crore as of September 2020 from Rs 8,34,936 crore in June 2020 — a decline of 5.25 per cent in absolute terms as the central bank allowed relaxation in the computation of bad loans and announced a loan restructuring scheme.

However, gross NPAs have gone up by Rs 44,782 crore from Rs 7,46,306 crore in the March quarter, according to figures compiled by Care Ratings. Although as a percentage of advances, there has been improvement in the gross NPA ratio in September at 7.7 per cent compared with 8.2 per cent in June and 7.9 per cent in March, the RBI and analysts have warned against a spike in bad loans in the coming months.

“All banks witnessed an improvement in this ratio in September over June. For private sector banks (excluding IDBI Bank), the ratio came down from 5.4 per cent to 5 per cent. For public sector banks (13) including IDBI Bank, the NPA ratio was down from 10.2 per cent to 9.7 per cent,” said Madan Sabnavis, chief economist, Care Ratings. The moratorium provided till August had given space in terms of recognition of NPAs, which could have improved the ratios. “Therefore we may have to wait for these time periods to elapse to gauge the true levels of NPAs in the system,” he said.

Banks have been permitted by the RBI to undertake a one-time restructuring exercise of loans affected by the pandemic, which will provide relief in terms of bad loan recognition and provisioning. However, the exercise may leave the sector saddled with a high bad-loan burden over next few years if restructured loans do not perform as per agreed milestones, an India Ratings report said.

In a circular issued in May, the RBI said, “in respect of all accounts for which lending institutions decide to grant moratorium/ deferment, and which were standard as on March 1, 2020, the 90-day NPA norm shall also exclude the extended moratorium/deferment period. Consequently, there would be an asset classification standstill for all such accounts during the moratorium/deferment period from March 1, 2020 to August 31, 2020. Thereafter, the normal ageing norms shall apply.”

“Fearing a spike in NPAs, the RBI later allowed banks to restructure the loans of corporates, retail borrowers and MSMEs. A clear picture about the bad loans will come in the December and March quarters. Many banks including SBI are sitting on a pile of stressed assets which could slip into NPAs by March 2021,” said the senior official of a nationalised bank.

State Bank of India (SBI), reported a lower NPA of Rs 1,25,862 crore in September from Rs 129,660 crore in June. However, it cautioned that total slippages and restructuring book could rise to Rs 60,000 crore (2.5 per cent of advances) by end of FY21.

Gross NPAs stood at 5.28 per cent of advances as compared to 7.19 per cent in the year-earlier quarter. SBI said its gross NPA would have been at 5.88 per cent if the bank had classified the loan accounts as NPA after August 31, 2020, in accordance with the RBI’s norms. The bank has estimated slippages of Rs 14,388 crore but for the Supreme Court interim order on deferment of asset classification (including unrealised interest).

Punjab National Bank reported gross NPAs of Rs 96,313 crore in the September quarter as against Rs 1,01,849 crore in June this year. Further, Bank of Baroda posted gross NPAs of Rs 65,698 crore (down from Rs 69,132 crore), Union Bank Rs 95,796 crore (Rs 97,189 crore) and ICICI Bank Rs 38,989 crore (Rs 40,386 crore).

The RBI data shows that Indian banks wrote off nearly $85 billion over FY14-FY19, of which state-owned banks contributed nearly 80 per cent. The economic stress this time around is set to be deeper and more broad-based, which could make restructuring more challenging. Execution risk remains high, notwithstanding the safeguards built in by the RBI in terms of tighter timelines, penal provisioning and more monitoring by the expert committee of loans beyond Rs 1,500 crore. However, timelines are short, since banks need to identify and agree upon a resolution plan by December 2020, including small retail loans and loans to micro enterprises and SMEs which will sit outside the committee’s purview, Fitch Ratings said.

In its Financial Stability Report released this July, the RBI warned that the gross NPA ratio of all scheduled commercial banks (SCBs) may increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021. If the macroeconomic environment worsens further, the gross NPA ratio may escalate to 14.7 per cent under very severe stress.

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