Banking system set for positive times ahead

Things seem to be looking up for banks, going by the assessment of credit rating agencies (CRAs) Moody’s Investors Service and Crisil Ratings.

Moody’s has revised the outlook for the Indian banking system to “stable” from “negative” on the back of stabilising asset quality and improved capital drive.

Crisil Ratings said the rise in bank NPAs will be muted (at 8-9 per cent in FY22 against 7.5 per cent in FY21) due to various Covid-19 pandemic-related dispensations such as the restructuring dispensation, and the Emergency Credit Line Guarantee Scheme (ECLGS).

This is well below the peak of 11.2 per cent seen at the end of fiscal 2018.

In its banking system outlook for India, Moody’s observed that the deterioration of asset quality since the onset of the coronavirus pandemic has been moderate, and an improving operating environment will support asset quality.

Moody’s view

The global credit rating agency opined that declining credit costs as a result of improving asset quality will lead to improvements in profitability. It assessed that capital will remain above pre-pandemic levels.

Moody’s expects India’s economy to continue to recover in the next 12-18 months, with GDP growing 9.3 per cent in the fiscal year-ending March 2022 and 7.9 per cent in the following year.

The agency noted that the pick-up in economic activity will drive credit growth, which it expects to be 10-13 per cent annually.

Weak corporate financials and funding constraints at finance companies have been key negative factors for banks but these risks have receded.

According to Moody’s, the deterioration of asset quality since the onset of the pandemic has been more moderate than it expected despite relatively limited regulatory support for borrowers.

The agency said the quality of corporate loans has improved, indicating that banks have recognised and provisioned for all legacy problem loans in this segment.

“The quality of retail loans has deteriorated, but to a limited degree because large-scale job losses have not occurred. We expect asset quality will further improve, leading to decline in credit costs, as economic activity normalises,” Moody’s said.

Crisil outlook

Crisil Ratings said Covid-19 related relief measures will help limit the rise in NPAs.

While loans in the retail and MSME segments are expected to be the most impacted, corporate loans are seen to be far more resilient. The agriculture segment is expected to remain relatively stable.

With about 2 per cent of bank credit expected under restructuring by the end of this fiscal, Crisil assessed that stressed assets comprising gross NPAs and loan book under restructuring should touch 10-11 per cent (against March-end 2021 estimate of about 9 per cent).

Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, Crisil Ratings, said: “The retail and MSME segments, which together form about 40 per cent of bank credit, are expected to see higher accretion of NPAs and stressed assets this time around.

“Stressed assets in these segments are seen rising to 4-5 per cent (from 3 per cent last fiscal) and 17-18 per cent (14 per cent), respectively, by this fiscal end. The numbers would have trended even higher but for write-offs, primarily in the unsecured segment.”