Asset quality pressure on banks to moderate by FY22-end, says Icra

The Net NPAs would also move up to 3.1-3.2 respectively by March 2021 from 2.2 per cent as of September 2020 on elevated credit provisions during H2FY21 as well
Asset quality pressure on banks in India is likely to moderate with net non-performing assets (NPAs) declining to 2.5 per cent by March 2022 (FY22) from an estimated 3.1 per cent in March 2021, according to rating agency Icra. 

The loan restructuring volume is likely to be lower at 2.5-4.5 per cent of advances than initial estimates of 5-8 per cent of advances, it added.

Icra said in a statement that moratorium on loan repayments is over, though the Supreme Court directive on asset classification is awaited. In this backdrop, the Gross NPAs are likely to rise to 10.1-10.6 per cent by March 2021 from 7.9 per cent in September 2020. 

The Net NPAs would also move up to 3.1-3.2 respectively by March 2021 from 2.2 per cent as of September 2020 on elevated credit provisions during H2FY21 as well. 

However, Net NPAs and credit provisions will subsequently trend lower in FY22 as the banks have reported strong collections on loan portfolio. Most banks reporting collections of over 90 per cent. 

The loan restructuring requests much lower than previously estimated due to sharper than expected improvement in economic activities and liquidity support through emergency credit line guarantee scheme.

Anil Gupta, Sector Head – Financial Sector Ratings, Icra said, with expectations of sustained collections and lower restructuring, the asset quality is expected to improve further. This will lead to lower credit provisions and better profitability in FY2022. This provides impetus to lenders and rejuvenate their lending decisions. 

The low interest rates, improved business volumes, better job prospects and income levels could also stimulate credit demand next year. This coupled with better competitive positioning of banks on steep decline in cost of deposits could improve bank credit growth to 6.0-7.0 per cent in FY2022 from an estimated 3.9-5.2 per cent in FY21 and 6.1 per cent in FY20, it added.


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