Asset quality pressure on banks to moderate by FY22-end

Asset quality pressure on banks in India is likely to moderate with net non-performing assets (NPAs) declining to 2.5 per cent by March 2022 (FY22) from an estimated 3.1 per cent in March 2021. The loan restructuring volume is likely to be lower at 2.5-4.5 per cent of advances than initial estimates of 5-8 percent of advances.

The Gross NPAs are likely to rise to 10.1-10.6 per cent by March 2021 from 7.9 per cent in September 2020. The Net NPAs would also move up to 3.1-3.2 respectively by March 2021 from 2.2 per cent as of September 2020 on elevated credit provisions during H2FY21 as well. However, net NPAs and credit provisions will subsequently trend lower in FY22 as the banks have reported strong collections on loan portfolios. Most banks report collections of over 90%.

The loan restructuring requests are much lower than previously estimated due to sharper than expected improvement in economic activities and liquidity support through Emergency Credit Line Guarantee Scheme (ECLGS). The low interest rates, improved business volumes, better job prospects and income levels could also stimulate credit demand next year. This coupled with better competitive positioning of banks on steep decline in cost of deposits could improve bank credit growth to 6.0-7.0 per cent in FY22 from an estimated 3.9-5.2 per cent in FY21 and 6.1 per cent in FY20.

Source: Business Standard