MUMBAI: India Ratings and Research (Ind-Ra), the leading rating agency, has warned that most public sector banks could close the current financial year with a loss, thanks to COVID 19 and the consequent financial stress in the economy that led to the six-month-long moratorium.
Revising its outlook on the banking sector to Negative for the second half (H2) of 2020-21 (FY21) from Stable, Ind-Ra expressed concern that up to 7.7 per cent (Rs8.4 trillion) of the total bank credit at end-March 2020 could get restructured or if they do not qualify for restructuring, they may slip
Ind-Ra viewed that there could be a spike in stressed assets, higher credit costs, weaker earnings on account of interest reversals and lower fee income, and muted growth prospects in the wake of the measures taken to contain the spread of COVID-19.
Additionally, capital buffers for most public sector banks (PSBs) remain modest. “As per Ind-Ra’s bear case, the spike in stressed assets due to pandemic is expected to double the credit costs for banking system than estimated pre-COVID-19 levels for FY21,” the agency noted.
Negative Outlook on PSBs
The agency has revised the rating outlook on public sector banks (PSBs) to Negative for H2, FY21 from Stable. PSBs’ modest capital buffers are expected to deplete further in FY21, due to provisioning requirements.
Also, pre-COVID profitability expectations for FY21 would be belied and most banks are likely to report net losses, according to Ind-Ra. PSBs may also need to continue to build up their provision cover in FY22 for restructured assets as some of the restructured assets could turn NPA in FY23.
PSBs’ could require Rs350 billion-550 billion in H2, FY21 for Tier 1 ratio of 10 per cent. COVID-19/contingent provisions are much lower than that for private banks.
Stable outlook for private banks
Ind-Ra has maintained a Stable outlook for private banks, as they are better placed to withstand the challenges presented by the pandemic. Most large banks have strengthened their capital buffers, built contingent provisions and have been proactive in managing the loan portfolio.
While the system’s credit growth could remain anaemic, and short-term financial performance could deteriorate modestly, Ind-Ra believes that large banks may benefit from credit migration.
“As opportunities arise, these banks are in a position to gain substantial franchise growth in the medium term, given that they have also added to their capital buffers over the past few months,” the agency noted.
Restructuring is key
The agency views that under the new restructuring framework, lenders would be able to handhold those borrowers who have been temporarily impacted by COVID-19 but are otherwise viable.
Certain stressed assets, though not at the risk of an immediate slippage, could also be restructured. As per Ind-Ra’s estimates, up to 7.7 per cent (Rs8.4 trillion) of the total bank credit at end-March 2020 including corporate and non-corporate segments could get restructured or if they do not qualify for restructuring, they may slip. It could be higher, if the restructuring in non-corporate segments exceeds 1.9 per cent of the total bank credit.
The restructuring/slippages quantum from the corporate sector in FY21 could range between 3 per cent to 5.8 per cent of the banking credit amounting to Rs3.3 trillion-6.3 trillion; even stressed assets that may not slip in the near term could be restructured as COVID-19 would have aggravated stress.