Ind-Ra downgrades Indian banking outlook to negative for H2
Sep 18, 2020
Mumbai (Maharashtra) [India], Sep 18 : India Ratings and Research (Ind-Ra) on Friday revised its outlook on the banking sector to negative for the second half of current financial year from stable.
This is in view an expected spike in stressed assets, higher credit costs, weaker earnings on account of interest reversals and lower fee income, and muted growth prospects in the wake of the measures taken to contain the spread of Covid-19.
Additionally, capital buffers for most public sector banks (PSBs) remain modest, said Ind-Ra, adding the spike in stressed assets due to pandemic is expected to double the credit costs for banking system than estimated pre-Covid-19 levels for FY21.
The agency revised rating outlook on PSBs to negative for H2 FY21 from stable. PSBs' modest capital buffers are expected to deplete further in FY21 due to provisioning requirements. Also, pre-Covid profitability expectations for FY21 will be belied and most banks are likely to report net losses.
They may also need to continue to build-up their provision cover in FY22 for restructured assets as some of the restructured assets could turn NPA in FY23. PSBs could require Rs 35,000 crore to Rs 55,000 crore in H2 FY21 for tier one ratio of 10 per cent. Covid-19 and contingent provisions are much lower than that for private banks.
Ind-Ra maintained a stable outlook for private banks as they are better placed to withstand the challenges presented by the pandemic.
On the other hand, up to 7.7 per cent (Rs 8.4 lakh crore) of the total bank credit at March-end including corporate and non-corporate segments could get restructured. If they do not qualify for restructuring, they may slip.
The restructuring and slippages quantum from corporate sector in FY21 could range between 3 to 5.8 per cent of the banking credit amounting to Rs 3.3 lakh crore to 6.3 lakh crore. Even stressed assets that may not slip in the near term could be restructured as Covid-19 would have aggravated stress.
Ind-Ra said agri (excluding farm credit) and micro, small and medium enterprises (about 25 per cent of advances in private banks and 32 per cent in PSBs) will contribute about 85 per cent of Rs 2.1 lakh crore (1.9 per cent of banking system credit) non-corporate restructuring while retail contribute remaining to the restructuring pool.
