Indian banks prepare for bad loans due to stronger balance sheets

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Previous efforts by Indian banks to bolster their balance sheets will help them mitigate the impact of asset quality as problem loans surged in the April-June quarter following the deadlier wave of the COVID-19 pandemic.

The State Bank of India, the country’s largest lender by assets, reported a total of Rs 1.36 trillion in bad loans for the first fiscal quarter ended June 30, up from Rs 1.28 trillion in the previous three months and Rs 1.31 trillion. rupees for the same period 2020.

ICICI Bank Ltd., the second largest private sector lender, said its gross non-performing assets rose by Rs 72.31 billion in the first quarter, mainly driven by the retail and business portfolio. The bank’s total NPA rose to Rs 440 billion at the end of the first quarter from Rs 430 billion a year ago. This was announced by the State Bank of Baroda new arrears of Rs 51.29 billion in the first quarter, up from Rs 27.40 billion in the previous period.

Banks “have have taken steps to strengthen their balance sheets over the past year or so to counter the impact of asset quality. This happened due to an increase in the capital base, an increase in the coverage of reserves and the availability of adequate volumes of liquidity, ”he said. Krishnan Sitaraman, Senior Director of CRISIL, a division of S&P Global Inc.

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Second wave

India’s economy was hit hard during the second wave of coronavirus, with daily cases exceeding 400,000 in May. Unlike in 2020, when the entire country was placed under lockdown to slow the spread of the virus, the federal and state governments were unprepared to deal with the sudden surge in a more dangerous delta variant. In recent weeks, the number of cases has decreased as the government stepped up vaccinations. The daily number of new infections fell to 25,166, the lowest since March, according to the Ministry of Health as of August 17.

However, the large number of COVID-19 cases and deaths – many experts believe the actual numbers were much higher than reported – are expected to have a larger impact on the economy in terms of job losses and business closures. In addition, most of the abstinence measures announced last year, including a Supreme Court ruling banning banks from classifying bad loans as nonperforming assets, were canceled after the economy recovered from an initial wave of infections.

In June, Sitaraman told S&P Global Market Intelligence that gross NPA increased, mainly in retail and SME portfolios for banks. “This is because these segments were more affected by the pandemic and isolation measures. The second wave of the pandemic had a much greater impact on health and geographic distribution than the first, ”Sitaraman said.

During the first quarter of the fiscal year, Indian banks saw higher-than-expected delinquencies of more than 200% year-over-year, which were mainly driven by retail and small and medium-sized businesses, according to a Jefferies policy note dated August 16. Jefferies analysts said slippage was higher than expected as new COVID-19 restrictions impacted fees, adding that some banks began to recover in July and normal operations could return in the second or third quarter of the fiscal year.

The quarter “was slightly worse than expected in terms of earnings and management forecasts … [but] most banks seem to be well equipped with buffers, ”Jeffreys said.

Underlined borrowers

Banks are now seeing the full extent of borrower stress with the one-off debt restructuring and Supreme Court failure to act on NPA recognition no longer available. IN The country’s Supreme Court allowed banks to re-classify bad loans as NPA in March, overturning an order dated September 30, 2020 that barred lenders from announcing any new bad loans in order to give borrowers more time to repay.

“In the absence of regulatory measures such as a moratorium, the gross formation of NAPs due to the recent wave of COVID-19 occurs in the first half of this fiscal year. [year] for the system, including us, “said Sandeep Bakhshi, CEO of ICICI Bank, during a profit and loss statement on July 24. Bakhshi expects the bank’s gross NPA growth to be lower in the second quarter and of the year. , “based on expectations of economic activity.

Reserve Bank of India stress tests showed that bad loans of all banks could rise to 9.80% by March 2022 from 7.50% in the same month of this year under the baseline scenario. However, the NPL ratio could rise to 11.22% by March 2022 in a “severe stress” scenario for key macroeconomic indicators, the central bank said in its semi-annual financial stability report, released July 1. pointed out that problem loans of all banks may rise to 13.5% by September.

“Many banks have increased reserve reserves and increased capital over the past year or so. This should help them cope with the growing stress in their retail portfolio, ”said Nikita Anand, analyst at S&P Global Ratings.

“On the other hand, banks with lower reserve buffers and weaker capitalization could see a dramatic impact on their profits and capital levels,” Anand said. “This may be more acute for banks with significant underlying risks for small business owners or unsecured retail products, where losses in the event of a default could be higher.”

As of August 18, 1 US dollar was equivalent to 74.27 Indian rupees.

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