Asset quality woes to continue affecting banks in FY2018: ICRA

Based on an analysis of the asset quality of the Indian banking sector conducted by credit-rating body ICRA, it can be observed that although the fresh non-performing asset (NPA) generation rate continues to show signs of moderation, declining asset quality still remains a prime concern.

The annualised fresh NPA generation declined to 4.1 percent during Q3 FY2017 as compared with 10.7 percent during Q4 FY2016, 6.1 percent during Q1 FY2017 and 5.8 percdent during Q2 FY2017.

The fresh additions to gross NPAs (GNPAs) during Q3 FY2017 stood at Rs. 264 billion as compared to Rs 1.36 trillion during 9M FY2017, partly aided by higher write-offs during the last quarter.

 

"While the declining fresh NPA generation may reflect the easing asset quality pressures, the large quantum of fresh slippages outside the standard restructured advances also reflects the asset quality pressure outside the restructured book. 55 percent and 77 percent of fresh NPAs generated during Q3 FY2017 and 9M FY2017 respectively were outside the restructured book," said Karthik Srinivasan, Senior Vice President and Group head - Financial Sector Ratings, ICRA Ltd.

"This is reflected in the relatively lower decline in the share of standard restructured advances by 57 bps to 3.1 percent (of standard advances) during the period March 31, 2016 to December 31, 2016; the GNPAs have, however, increased to 9.5 percent from 7.7 percent during this period," he added.

The large share of advances undergoing resolution through various schemes on resolution of stressed assets, especially the strategic debt restructuring (SDR) scheme, is also a matter of concern. In ICRA's sample set of 61 large borrowers having a total debt of Rs 2.45 trillion, are currently undergoing a resolution through the SDR scheme.

As on December 31, 2016, 72 percent of the debt continues to be classified as 'standard' advance on account of the applicability of the standstill clause on asset classification under the SDR scheme.

"SDR was invoked in most of the cases after Q2/Q3 FY2016 onwards and due to limited success seen in resolution of the SDR accounts and the impending expiry of the 18-month period on the applicability of the standstill clause for asset classification, the reported NPA numbers are likely to increase by the end of FY2017 and FY2018," said Srinivasan.

In its research note published on Wednesday, ICRA has projected the GNPAs to increase to Rs 7.5-7.7 trillion (9.7-10 percent) by end of FY2017 and Rs 8.2-8.5 trillion (9.9-10.3 percent) by the end of FY2018 with upside risks in case of slower resolution of SDR accounts leading to higher slippages.

The report also highlights the vulnerability of the accounts that have undergone resolution through 5/25 refinancing scheme. Of the 40 large borrowers in ICRA's sample set having a total debt of Rs 3.16 trillion and have undergone resolution through 5/25 refinancing, 29 percent of the debt has turned NPA till December 31, 2016.

ICRA highlights that those accounts that are currently servicing only the interest because of extended moratorium on principal repayments as part of loan restructuring arrangement will also remain vulnerable to slippages during FY2018.

With asset quality pressures, banks, especially the weaker public sector banks (PSBs) have been reporting a continuous decline in their net interest income (NII) over the five consecutive quarters of Q3FY2016 to Q3FY2017, mainly on account of slower credit growth, reversal of interest income recognised on accrual basis on NPA accounts and increase in NPA levels resulting in a decline in earning assets.

Weakening cost to income ratios for PSBs and elevated credit costs is expected to result in weak net profitability of banks with estimated PAT/ATA of 5-10 bps for FY2018. This will translate into low single digit return on equity (RoE) for PSBs; while RoE for the private banks is projected to be over 10 percent during FY2018.

High levels of AT1 issuances during FY2017 on the back of enhanced investor appetite and the revision in capital infusion plans by the Government of India during March 2017 wherein the weaker PSBs secured higher than initially allocated capital, should enable PSBs meet the regulatory capital requirements for FY2017.

However, the capital requirements under Basel III for the PSBs remain large in relation to the capital infusion of Rs 200 billion announced by the Government for FY2018 and FY2019.

ICRA's estimates that for the total Tier I capital requirements for the PSBs to be Rs 1.2 - 1.3 trillion for FY2018-FY2019, Rs 0.8-1.0 trillion has to be CET-I and balance 0.3-0.4 trillion can be met through issuances of AT1 bonds.