At a time when banks are already saddled with high non-performing assets (NPAs), any fresh slippage could hit credit growth and delay India's recovery from the COVID-19 pandemic. According to a India Ratings (Ind-Ra) report, top five private sector banks may see their slippages doubling to 5 per cent in financial year 2020-21 due to the poor loan offtake and the moratorium-driven contraction in net interest margins.
These top five private sector banks - HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank and IndusInd Bank - constitute 25 per cent of the overall banking and 75 per cent of private bank space, said the report.
As per the report, the slippages for these banks would be around 5 per cent for FY21 as against 2.3 per cent in FY19 and 2.7 per cent in FY20 (net slippages would be lower), if refinancing remains a challenge. As per Ind-Ra's scenario analysis, at 5 per cent gross slippages, these banks' net interest margins (NIMs) could contract by 4 per cent.
The agency also opined the operating buffers (pre-provisioning operating profit - PPOP) of these five private sector banks could decline by up to 15 per cent year-on-year in FY21. This would decrease the ability of lenders to withstand credit costs without capital erosion.
"This would be an outcome of lower portfolio yields due to an increase in slippages, lower loan growth due to slow originations and limited enhancements, lower fee and other income as origination and transaction volumes ramp-up over FY21, slower pace of repricing for deposits in the marginal cost of lending rate (MCLR) regime than that for advances, and higher liquidity deployed in low earning government securities or under reverse repo," the report said.
The agency expects PPOP of these lenders to be about 80 bps lower than their steady state pre-provisioning operating profit, which in FY20 was 4.9 per cent which may curtail their ability to withstand credit costs without capital erosion.
The agency forecasts a significant rise in delinquent assets due to the deep troubles the economy is facing due to the impact of the GDP destruction on the banking sector in the aftermath of COVID-19 crisis. The pandemic is likely to aggravate that stress. It also expects that the percentage portfolio under moratorium for these private banks would have increased by May 2020.
However, on a positive side, the deposit flows of these banks continue to be robust. The growth in deposits for these top five private banks in FY20 was 18.8 per cent versus 18.5 per cent in FY19, while the loan growth declined to 15 per cent against 19.1 per cent in FY19. Adding to it, the Reserve Bank of India has injected Rs 1.7 lakh crore of liquidity into the system over the last six months through open market operations and secondary market purchases.