The quality of the banking system’s assets, particularly the restructured portfolio, could face headwinds in the coming days as Covid-19 cases have started to rise again rapidly, rating agency Icra said.
In September 2021, the Indian banking system restructured loans worth 2.8 trillion rupees or 2.9% of standard advances, of which about 1 trillion rupees was restructured under Covid 1.0 and rupees were restructured under Covid 2.0, and the rest was restructuring done for Micro, Small and Medium Enterprises (MSMEs).
Anil Gupta, vice president of financial sector ratings, Icra Ratings, said that as banks have restructured most of these loans with a moratorium of up to 12 months, this book should start to come out of the moratorium from T4FY22 and T1FY23.
“As a result, a third wave poses a high risk to the performance of borrowers who have been affected by previous waves and therefore poses a risk to the trend of improving asset quality, profitability and creditworthiness. “
He added that due to the third wave, demand for loan overhauls could pick up, including for those who have already been overhauled. “In such a case, visibility into the performance of the restructured loan portfolio, which was previously expected in FY23, can now be expected in FY24, as the moratorium on existing restructured loans could be extended,” Gupta said.
In its semi-annual Financial Stability Report, the Reserve Bank of India (RBI) also warned that Indian banks’ asset quality could plummet, but assured lenders had enough capital to withstand a shock. He had also expressed a similar sentiment in the Trends and Progress Report.
RBI’s macro-stress tests revealed that the gross non-performing asset ratio (GNPA) of the banking system could decline from 6.9% in September 2021 to 8.1% by September 2022 in the scenario. baseline and 9.5% under severe stress. scenario.
According to ICRA’s estimate, about 60% of the total Rs 1 trillion restructuring under Covid 1.0 was attributable to corporates and the balance to the retail and MSME segments. So the restructuring under Covid 2.0, which was available to retail and MSME borrowers, amounted to 3x of the restructuring under Covid 1.0 because in the second wave, the RBI did not announce any moratorium on repayments.
Public sector banks were relatively more accommodating to borrowers’ requests for restructuring, with their restructured books amounting to 3.2% of standard advances compared to 2.2% for private sector banks.