As NPA resolution crawls, banks stare at spike in credit cost

With slower pace of resolution of bad loans, banks are staring at a spike in their credit cost,
which is set to rise in the range of 1.9-4.6 percent for the second half of the current fiscal, says report.

In its earlier assessment, India Rating had estimated the system-wide credit cost floor at 1.9 percent and capped it at 4.4 percent for the second half of FY19 and whole of FY20 (rpt for the second half of FY19 and whole of FY20).

“Given that the pace of resolutions has slowed down significantly since then, credit cost is expected to be marginally higher than earlier estimate, while the floor will be irrelevant.

On a bottom-up basis, credit cost is set to rise to 4.6 percent for the system for the period H2FY19 and FY20 (rpt for the period H2FY19 and FY20),” an India Rating report said on  Tuesday (September 25).

For the second half, it has revised upwards the credit cost estimate for state-run banks by 30 basis points to 5.2 percent, while for private sector banks it is pegged at 3.2 percent-at the same level as the previous estimate.

“Any pick up in stressed asset resolutions may result in lower net credit cost,” it added. The agency said material incremental NPA generation for fiscal 2020 and 2021 may come from the agriculture and MSME sectors.

With the RBI giving forbearance to MSMEs until March 2020, some of the incremental stress in this segment can show up in FY21, unless the economy picks up, the report said.

Muted rural income growth, along with announcements or expectations of farm loan waivers continue to weigh on asset quality of farm loans.

The agency remains cautious on the retail loans where some banks have increased provisioning as a precautionary measure following reports of rising delinquencies.

“We believe there will be further moderation in retail loans in FY20, given the consumption slowdown across segments including housing and auto,” the report said. Even the unsecured loans, which include credit cards, education loans and personal loans have seen a moderation to 18 percent over FY19.

The agency believes that the slowdown in the near-term can partially be offset by market share gains for banks in the overall retail segment as NBFCs are still facing deep
liquidity challenges.

The report expects the ₹70,000 crore capital immediate allocation for public sector banks to be adequate to provide for existing stress, given the slow pace of corporate stressed resolutions.

The agency sees return on assets of state-run banks and their private sector peers is expected to increase by up to 10 bps and 30 bps, respectively, as a result of the cut in corporate taxes.