Gross non-performing assets (GNPAs) of banks are expected to touch their lowest level in the last 10 years by the end of 2023-24, ratings agency CRISIL said. Bad loans or GNPAs are a major indicator of asset quality, and, as per the CRISIL note, they are expected to improve 90 basis points to around 5 per cent this fiscal and another 100 bps to a decadal low of 4 per cent by 31 March 2024.
The report noted that post-pandemic economic recovery and higher credit growth in the current year can be attributed to the overall improvement.
The agency in its note issued on September 21 said that the asset quality of the banking sector will also benefit from the proposed sale of non-performing assets to the National Asset Reconstruction Company Ltd (NARCL). It noted that all segments will perform equally well, but the corporate segment will see the biggest improvement in the coming quarters, where bad loans can dip below 2 per cent next fiscal from a peak of 16 per cent on 31 March, 2018.
“We expect slippages to trend 50 bps lower at two percent for fiscal 2024 versus 2.5 percent last fiscal as the economy stabilises. This should support asset quality metrics even as the pace of write-offs, which contributed almost 60 percent to the reduction in gross NPAs in the past three fiscals and large-ticket resolutions decelerate," said Subha Sri Narayanan, director, CRISIL.
The note added that the asset quality improvement in the corporate segment is due to a “significant clean-up” done of bank books in recent years, which strengthened risk management and underwriting. This made ways to choose borrowers with better credit profiles. It noted that mechanisms such as the Insolvency and Bankruptcy Code have also supported recoveries and increased credit discipline among borrowers.
The deleveraging and strengthening of India Inc. balance sheets also helped, the agency added. This is reflected in the CRISIL Ratings credit ratio (upgrades to downgrades), which touched 5.04 in the second half of last fiscal.
“The steady improvement in the corporate asset quality is clearly reflected in leading indicators such as the credit quality of bank exposures. A CRISIL Ratings study of large exposures of banks, constituting more than half of corporate advances, shows the share of high-safety1 exposures has increased to 77 per cent as on March 2022 from 59 per cent in March 2017, while exposure to sub-investment grade companies more than halved to 7 per cent versus 17 per cent,” said Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings.
Point of contention
The report noted that the MSME segment, which suffered the most during the pandemic, may see a rise in its gross NPAs to ~10-11 per cent by March 2024 from ~9.3 per cent on March 31, 2022. While relief measures did help contain asset quality deterioration in 2021-22, the segment saw the most restructuring at ~6 per cent compared with ~2 per cent for the overall banking sector. About a fourth of these accounts could potentially slip into NPAs.
The retail sector remains resilient and gross NPAs are expected to remain range bound at 1.8-2.0 per cent over the medium term. However, the agency noted that the impact of increase in interest rates and inflationary pressure on individual borrowers’ cash flows will have to be monitored, as half of the retail loans are home loans.
For unsecured loans, banks may see some pressure as overall retail asset quality is expected to stay within expected bounds. The agriculture segment gross NPAs were seen at 9-10 per cent following another year of reasonably normal monsoon and harvest.
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