Banks' asset quality to improve after FY18: Icra

Rating agency Icra expects Indian banks’ asset quality woes to peak by FY18 and that resolution process that has started already would eventually bring down the pain.

The rating agency expects the gross non-performing assets (NPAs) of the banking system to reach about Rs 9 lakh crore, or 10.2 per cent of the total loans, against Rs 7.65 lakh crore, or 9.5 per cent as of March 2017.

The failure of the strategic debt restructuring (SDR) mechanism by banks is partly responsible for the recent pile-up of fresh slippages.

“Therefore, the asset quality pressures are also expected to arise from the advances undergoing resolution under various schemes of resolution on stressed assets — especially the SDR and the weakness seen in some large corporate accounts, apart from the increasing demand for waiver of farm loans,” Icra said in its webinar on outlook for Indian banks. 

Though FY18 may continue to pose asset quality pain for banks, it may also turn out to be a decisive year for resolution of the stressed assets, as the Reserve Bank of India (RBI) has stepped up the resolution process, said Karthik Srinivasan, group head, financial sector ratings at Icra.

“The RBI’s directive to banks to initiate proceedings against 12 large borrowers under the Insolvency and Bankruptcy Code will break the status quo situation and force the stakeholders to arrive at a resolution plan,” Srinivasan said. Fresh slippages could be at three to four per cent of advances in FY18, while provisions required for old NPAs that deteriorated further, and relatively lower treasury gains, could result into another year of losses or low single-digit return on equity for public sector banks (PSBs). 

However, PSBs are expected to report relatively healthy return on equity at 10-12 per cent for FY18.

PSBs’ additional capital need would be at around Rs 90,000 crore to Rs 1 lakh crore in two years to March 2019 as core equity of these banks continue to worsen at a time when the minimum regulatory capital requirement is on the rise.