Banks will continue to see their credit costs (amount set aside for bad loans) stay at 2-3 per cent in FY19 and FY20 because of ageing toxic assets and accelerated provisioning. The slippages from non-corporate loan book covering farming, small, micro enterprises and retail segments will also add to provisions, according to rating agency India Ratings and Research.
The need to provide for assets under new accounting standards (IndAs), if implemented from FY20 onwards, has also decreased to about Rs 0.3 trillion from Rs 0.87 trillion. Banks have already incurred the substantial credit costs in FY18. Most of the impact is likely to be absorbed over the normal course of business in FY19, the rating agency said.
The non-performing assets (NPAs) in agriculture, small and medium-sized enterprises (SME) and personal/retail loan segments have increased significantly (in terms of percentage). Given that Reserve Bank of India (RBI) forbearance is available in some of these segments in terms of recognition, part of incremental credit costs on such accounts may be recognised in Q4FY19-FY20, it added.
The agency has meanwhile maintained a stable outlook on private sector banks for the remainder of FY19 because of robust capitalisation with high asset growth, and ability to gain market share profitably. The outlook on two large public sector banks (PSBs), State Bank of India (‘IND AAA’/Stable) and Bank of Baroda (‘IND AAA’/Stable) is also stable.
It retained a negative outlook on the remaining PSBs owing to their weak capitalisation and expected aging provisions on the large stock of non-performing loans. The provisioning burden would continue to be a drag on their performance and impair their ability to maintain the market share and systemic importance.
The agency expects the balance sheet of most PSBs to remain stagnant, given increasing capital requirements under Basel III transition, despite government infusions over FY18-FY19.
Some of the banks have large funding gaps which will result in a continuing decline in market share. The agency will continue to evaluate the support stance of the government towards these banks. Referring to assets quality of corporate loans, Ind-Ra said during FY16-FY18, the stressed corporate assets remained in the range of 20 per cent-21 per cent of total bank credit. Recognition in some form has increased due to the RBI’s proactive stance, starting with the first asset quality review in FY16.
Of the Rs 4.5 trillion assets identified for resolution (National Company Law Tribunal list 1 and list 2), the companies with operating assets will warrant lower haircuts by the banks. The exposures on contractors (EPC companies) may attract heavy haircuts.
Of the two lists, Rs 0.8 trillion from list 1 has been resolved (winning bidders have been either taken-over or identified) until Q1FY19. For the remainder, a total haircut/provision of 65 per cent-70 per cent on list 1 and about 75 per cent on list 2 is expected. The number may vary for individual banks depending on their exposures. The rating agency said the prevailing stressed financial conditions could intensify credit tightening, unless liquidity of financing channels is at least partially reinvigorated.
The adverse conditions in the interest rate market, increasing risk aversion amongst PSBs, volatile external environment and limited access to alternative financing options are critical to corporate credit quality in FY19, mainly for entities with weak credit profiles, it added.
via Banks’ credit costs to stay at 2-3% till FY20, says India Ratings | Business Standard News
aniltikotekar4sme.com 