“We believe non-performing loan (NPL) risks are lower than our earlier estimates and the new rules would give banks more time to build provisions. The recent capital infusion at some banks and NBFCs are additional cushion. We cut our FY21/2021-22 estimates for gross NPL formation from 7 per cent/5 per cent to 4 per cent/5 per cent of loans,” observed UBS.
ICICI Bank, Kotak Mahindra Bank, Axis Bank, and YES Bank
have raised a combined Rs 47,000 crore in the past four months, while HDFC Bank has raised Rs 14,000 crore. Another four NBFCs have raised Rs 5,470 crore, shows the data from PRIME Database. Goldman Sachs recently upgraded State Bank of India — the country’s largest lender — to ‘buy’.
Market players say the RBI had taken similar measures in the 2008 crisis, but the loan book size of banks has grown manifold since then and the stress on asset quality became palpable even before the pandemic hit home. HDFC Securities Chief Executive Dhiraj Relli said the extension of the interest holiday may be necessary in a few cases, as businesses will have to be given time to recover from the pandemic.
“Although this could mean sweeping the problem under the carpet and deferring the pain for some cases, we really don’t have a choice. Hopefully, the provisioning requirements for moratorium and/or restructuring may prevent banks from evergreening. If banks continue evergreening by offering moratorium, the pain will compound and create a larger balance-sheet hole. If a blanket moratorium extension does come through, it may result in a sharp derating of the financial sector,” said Relli.
NBFCs may find themselves in a more difficult position than banks. “The overall liquidity scenario has improved for NBFCs, but underlying weak economic activity and general risk averseness keep growth in check. Moratorium rates have moderated, but remain high. Awaiting the asset quality fallout, most NBFCs have shored up provisioning buffers, weighing on profitability,” said Emkay’s Dama.
“We think NBFCs’ funding troubles could result in stronger pricing and higher loan growth for banks in the near term. We believe certain banks are well placed in the emerging landscape, given their strong offering of most financial products and solid retail deposit franchises,” added UBS.