Credit rating body ICRA in its report released on Monday estimated the gross non-performing assets (GNPA)s of Rs. 8.8 to 9.0 trillion (10.0-10.2 percent) to peak out by end of FY 2018, as against GNPAs of 9.5 percent (Rs. 7.65 trillion) as on March 31, 2017.
In contrast to the sectoral trend of reduced fresh slippage, the private banks (PVBs) reported a sequential increase of fresh slippages during Q2 FY2018, partially driven by recognition of divergences in asset classification under the risk-based supervision (RBS) conducted by the Reserve Bank of India (RBI) for some PVBs.
Fresh slippages during Q2 FY2018 at 3.9 percent (annualised) as against 6.3 percent (annualised) during Q1 FY2018 and 5.5 percent for FY2017 were the lowest since the beginning of the Asset Quality Review (AQR) initiated by the RBI during Q3 FY2016.
Further, it noted that more than 80 percent of the slippages during the quarter were outside the standard restructured advances. Accordingly, the asset quality pain is likely to continue in the near term with Rs. 1.7 trillion of standard restructured advances.
While the addition to fresh GNPAs may be moderating, limited resolution of these NPA accounts as reflected by lowest quarterly recoveries and upgrades during last five years and; the consequent ageing of the NPAs, the credit provisions has surged for the sector.
The loan write-offs too touched all-time high during the quarter, which coupled with RBI's directive of higher provisioning on the accounts to be resolved under Insolvency and Bankruptcy Code (IBC) 2016 led to rise in provisions during the quarter.
"With the recent amendments in IBC, debarring defaulting promoters to submit a resolution plan, the likelihood of the higher losses and a further increase in credit provisions appears to be a likely possibility. Further, a limited resolution seen in the second list of stressed borrowers may also force banks to refer to these borrowers under IBC, further adding to the provisioning requirements. While debarring defaulting promoters may add to short-term pain for banks, it may discourage over leveraging by borrowers and is likely to be good for the overall credit culture in future," said Karthik Srinivasan, Group head - Financial Sector Ratings, ICRA Ltd.
Banks credit provisions surged to Rs. 645 billion during Q2 FY2018, up by 40 percent on a sequential basis and 30 percent on a YoY basis. For H1 FY 2018, the total credit provisions were up by 17 percent on a Y-o-Y basis at Rs. 1.1 trillion.
More From This Section
"With the total exposure of Rs. 3.0 trillion of accounts likely to be resolved under IBC, as per our estimates, the overall credit provisions are likely to be at Rs. 2.4-2.6 trillion (including impact of ageing on existing NPAs and provisioning on IBC accounts) for FY 2018 as against Rs 2.0 trillion during FY 2017. This can result in losses before taxes of Rs 300-400 billion for public sector banks (PSBs) during FY 2018, even as the return on equity (RoE) is expected to moderate for PVBs to 9.4-10.2 percent during FY 2018 as against 12 percent in FY 2017," Srinivasan said.
With losses before taxes of Rs. 55 billion during Q2 FY 2018 and Rs. 58 billion in H1 FY 2018, PSBs are weakly positioned on their capital ratios with seven PSBs (out of 21) and 12 PSBs below the regulatory minimum capital level required for March 31, 2017 and March 31, 2018 respectively. With this backdrop, the Government of India (GoI) recently announced the much-awaited recapitalisation plan for PSBs.
"Based on the estimated losses, we expect the GoI to infuse at least Rs 850 billion of recapitalisation bonds during FY 2018 itself so that PSBs can meet the regulatory minimum capital requirements for March 31, 2018," said Srinivasan added.
Announcement of bank recapitalisation also resulted in reduced risk aversion as reflected in increase in issuance of Additional Tier I (AT-I) Bonds at 200-250 bps lower than their previous issuances, despite expectations of weak financial performance in near term.
With the challenges of meeting capital levels, the PSBs continue to refrain from growing advances, which is reflected in a Y-o-Y growth of less than one percent in advances of PSBs even as the PVBs continue to achieve a higher Y-o-Y growth of 17.2 percent as on September 30, 2017. Only four PSBs out of 21 reported a credit growth higher than the industry average (Y-o-Y growth of 5.1 percent).
With higher growth in advances for PVBs, the market share of private banks in advances stood at 30 percent as on September 30, 2017 as against 27 percent as on March 31, 2017. The YoY growth in non-food credit of banks improved to 9.0 percent as on November 10, 2017 and is expected to improve further to 10 percent during December 2017 because of lower base after old currency notes were used to prepay loans post demonetisation.
However, subsequently, with higher base, the credit growth is expected to taper down with estimated credit growth of seven to eight percent for the sector during FY2018.
The YoY deposit growth continued to decline and stood at 8.1 percent for November 10, 2017. For the first time post demonetisation, deposit growth was lower than credit growth. With higher deposit base, post demonetisation, we expect the Y-o-Y deposit growth to further decline to three to four percent levels during December 2017 and gradually increase to five to seven percent level by end of FY 2018.
With the yield on 10-year Government Security (G-Sec) on an uptrend since August 2017, there was no cut in rates on GoI's small saving schemes for Q3 FY2018. With the uptrend in inflation limiting the scope of further cut in monetary policy rates, the yields are also likely to remain firm, limiting the scope of further cuts in GoI's small saving schemes.
In this backdrop, there was no cut in median one year deposit rates of banks during November 2017, even as competitive pressure forced banks to undertake a median cut of seven bps in their benchmark lending rates (1-Year MCLR).
"ICRA expects the scope of a further cut in deposit rates to be limited, even as the cost of deposits will continue to decline upon re-pricing of fixed deposits, which, coupled with competitive pressure, may drive a marginal cut in lending rates," said Srinivasan.